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Forex - Dollar Gains on China Tensions; Euro Awaits ECB

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The dollar has gained some buyers in early European trade Thursday, as tensions between China and the U.S. flared up again overnight, but gains against the euro have been limited ahead of the European Central Bank meeting.

At 3:10 AM ET (0710 GMT), the U.S. Dollar Index, which tracks the greenback against a basket of six other currencies, stood at 97.502, up 0.3%. However, the index is still down about 5% from its March peak, when the coronavirus pandemic had caused a sprint to this safe haven.

Elsewhere, USD/JPY rose 0.1% to 109.03, GBP/USD fell 0.3% to 1.2533 and EUR/USD dropped 0.2% to 1.1210.

Overnight, the U.S. administration suspended flights into its country by Chinese airlines effective from June 16, reciprocating after China had barred American carriers from entering its airspace.

Relations between the two countries soured after China’s approval of the enactment of national security laws in Hong Kong and Macau last month.

Still, EUR/USD remains above the 1.12 level that it broke through on Wednesday for the first time since mid-March. 

The currency has been bolstered by hopes for European Union-wide fiscal support measures after Germany last month threw its weight behind the idea of a European Union recovery fund, breaking away from its long-held tradition to resist moves towards fiscal integration in the currency bloc.

This prompted the European Commission to propose a 750 billion euro recovery fund, with the money divided into 500 billion euros given to EU countries as grants and the remaining 250 billion euros would be available as loans. 

The European Central Bank had been undertaking a lot of the heavy lifting needed to support the region’s weakest economies prior to this, and is still expected to offer up more largesse later Thursday.

"I suspect the market has already priced in an increase of about 500 billion in the PEPP and in the near-term, there is risk of a correction," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

"The market could react positively if the ECB expands the target of its bond purchase or scrap its limit on each country. But in terms of the total size, it is hard to expect a positive surprise now," he said.

The ECB delivers its policy decision at 1145 GMT and ECB President Christine Lagarde holds a news conference at 1230 GMT.

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