Dollar halts slide after Mnuchin pulls plug on Fed’s emergency schemes

By Hideyuki Sano

TOKYO (Reuters) – The dollar halted its week-long slide on Friday after U.S. Treasury Secretary Steven Mnuchin told the Federal Reserve to return money earmarked for pandemic lending to businesses, nonprofits and local governments.

While the move was aimed at re-appropriating some $455 billion allocated to Treasury under the CARES Act in the spring, some investors were concerned about ending programmes that they think have played a vital role in reassuring markets.

“Investors have banked on the MLF (Municipal Liquidity Facility) being a reliable, emergency lender to our (municipal bond) market’s core borrowers. It has taken the idea of a payment default or catastrophic budget problem off the table,” said Matt Fabian, partner at Municipal Market Analytics at Westport, Connecticut, in the United States.

“Without the MLF, the market won’t collapse, but it will lack some resilience if its tested by a selloff or more pronounced credit fears.”

The news helped to stop the dollar’s slide spurred after reports that U.S. Senate Republican leaders have agreed to resume negotiations on another coronavirus stimulus package.

For over a week, the dollar has been losing ground against riskier currencies due to coronavirus vaccine breakthroughs and hopes of reduced political uncertainty after the U.S. election.

The dollar index stood at 92.349 , off Thursday’s low of 92.236, though it is still down 0.34% on the week.

The euro fetched $1.1869 , flat on the day but not far from this week’s high of $1.18935 touched on Tuesday and up 0.3% on week.

The yen stood at 103.83 per dollar , retaining its weekly gain of 0.8%.

“The dollar/yen appears to have recovered strong correlation with U.S. bond yields over the past two weeks. This points to risk of further downside in the currency pair, should U.S. bond yields fall further,” said Tohru Sasaki, head of Japan market research at J.P. Morgan.

The British pound was on the defensive after the Times newspaper reported that European leaders will urge the European Commission to publish no-deal Brexit plans as the year-end deadline approaches.

The currency changed hands at $1.3247 . Against the euro, it stood at 0.8955 pound per euro , wiping its gains made over the past two days.

Outside the dollar index basket currencies, the Australian dollar, which has strong sensitivity to economic sentiment, dipped 0.1% to $0.7273 , having erased most of its gains this week.

The Chinese yuan eased about 0.1% to 6.5796 to the dollar after hitting a 2 1/2-year high of 6.5318 on Wednesday.

The Turkish lira held firm following a 2.3% jump on Thursday after the country’s central bank delivered a big rate hike as expected and pledged to remain tough on inflation.

The lira changed hands at 7.5350 to the dollar , near its highest level in almost two months.

Elsewhere, bitcoin retained its bullish tone, trading at $17.867 , near a three-year high touched on Wednesday.

(Reporting by Hideyuki Sano; Editing by Stephen Coates)