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The Dollar Gains while Euro Awaits ECB

The dollar has gained some buyers in European forex trading as tensions between China and the U.S. flared up. But gains against the euro have been limited ahead of the European Central Bank meeting.

The U.S. Dollar Index stood at 97.502, up 0.3%. but is still down about 5% from its March peak. This was when the coronavirus pandemic had caused a sprint to this safe haven.

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

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

Their relations had gone sour after China approved the enactment of national security laws in Hong Kong and Macau.

The euro dollar pairing remains above the 1.12 level that it broke through for the first time since mid-March.

Euro Awaits the European Central Bank Meeting

Hopes for European Union-wide fiscal support measures have bolstered the currency. This was after Germany threw its weight behind the idea of a European Union recovery fund last month. It was 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. The money divided into 500 billion euros. It would tend to EU countries as grants and therefore the remaining 250 billion euros would be available as loans.

The ECB had been undertaking a lot of the heavy lifting needed to support the region’s weakest economies before this. It is still expected to offer up more largesse later Thursday.

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

The forex exchange market could react positively. That is 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, Yamamoto added.

The European Central Bank delivers its policy decision at 1145 GMT.  It’s President Christine Lagarde will hold a news conference at 1230 GMT.

Meanwhile, in forex news, riskier currencies retreated from recent highs. The Australian currency (AUD) fell as much as 0.5% against the USD hitting a low of $0.6884.

The Norwegian krone (NOK), edged down from recent three-month highs against the dollar and euro.

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