(Investing.com): The U.S. dollar drifted lower in early European trade Tuesday, continuing the sharp losses seen overnight as signs of progress in the search for a Covid-19 vaccine sparked growing risk appetite.
At 2:45 AM ET (0645 GMT), the U.S. Dollar Index, which tracks the greenback against a basket of six other currencies, stood at 99.438, down 0.2%, well off Monday’s three-week high. USD/JPY rose 0.1% to 1.0738.
U.S. drugmaker Moderna (NASDAQ:MRNA) said late Monday that clinical results suggested its vaccine has a "high probability" to provide protection from coronavirus disease.
The positive update bolstered hopes that a vaccine may be found sooner rather than later, prompting investors to dump the safe haven dollar for currencies which may offer greater reward.
“There has been a big improvement in risk sentiment because of hopes for a vaccine,” said Junichi Ishikwa, senior FX strategist at IG Securities, told CNBC.
“Volatility is falling for stocks and dollar-funding costs are lower. It’s easy for the dollar to fall and for other currencies to ride the dollar’s losses higher.”
Federal Reserve chairman Jerome Powell is to testify on Tuesday before the Senate Banking Committee, alongside Treasury Secretary Steven Mnuchin, to update government officials on the economic stimulus programs approved so far.
The thorny issue of negative interest rates could be raised, and Powell is expected to repeat that a negative policy rate is not on the cards right now.
Also of note was the news late Monday that France and Germany are proposing a 500 billion euro ($545 billion) European recovery fund to be distributed to EU countries worst affected by Covid-19, with the funds provided as grants rather than loans.
This marks a shift in position by Germany, who had previously rejected the idea of nations sharing debt.
Other EU countries must agree with the proposal, however, and the idea of shared debt has proved an extremely difficult hurdle to pass in the past.
Still, EUR/USD climbed 0.2% to 1.0936, reaching levels last seen at the start of this month.
While the U.S. central bank members are doing their best to rule out the possibility of negative interest rates, their U.K. equivalents are doing exactly the opposite.
Over the weekend the Bank of England's chief economist, Andy Haldane, said the central bank was looking more urgently at negative interest rates, while rate-setter Silvana Tenreyro Monday talked up the benefits of such rates, citing the experience of other countries in Europe.