Dollar, yen slip as global tensions ease, pound rallies

The safe-haven dollar and yen fell on Wednesday after global political worries eased with what markets perceived as positive news in Hong Kong, Italy and Britain.

Sterling rallied above $1.22 on Wednesday for the first time since Aug. 30 as investors grew more optimistic after British lawmakers took another step in an attempt to block a no-deal Brexit.

The dollar index slid for a second straight session, while the yen, which draws safe-haven bids in times of geopolitical stress, dropped for the first time in four days against the greenback.

Risk appetite rose on news that Hong Kong leader Carrie Lam was withdrawing an extradition bill that triggered months of often violent protests.

Edward Moya, senior market analyst at OANDA in New York, said the dollar’s weakness was triggered by this “risk-on move in Hong Kong that gave Hong Kong equities one of the best moves in a few years.” That has boosted appetite for riskier currencies that have generally higher yields, he added.

“Everyone has been waiting for this major dollar reversal for quite some time,” Moya said. “This is providing a little bit of unwinding of some dollar bullish positions.”

In Italy, Prime Minister Giuseppe Conte unveiled a new cabinet that united the anti-establishment 5-Star Movement and the centre-left Democratic Party, an unlikely coalition that is expected to improve ties with the European Union.

In late U.S. trading, the dollar was last down 0.57% against a basket of major currencies, at 98.438.

The yen fell against the dollar, which rose 0.38% to 106.36 yen. It also declined against the euro, which gained 0.89% to 117.32 yen.

The euro also rose 0.52% versus the dollar to $1.10295 after comments from Christine Lagarde, who will likely be the European Central Bank’s next president, introduced some doubt over the scale of an ECB stimulus package expected next week.

Lagarde said highly accommodative monetary policy for a prolonged period was necessary but she added that the bank needed to be mindful of the negative side-effects of such tools.

Expectations for an interest rate cut, the relaunch of asset purchases and other ECB measures to stimulate the economy have weighed on the euro. On Tuesday, it hit a 28-month low around $1.0924.

Meanwhile, sterling jumped 1.15% to $1.2226 , and against the euro it rallied 0.65% to 90.22 pence.

The lower house of the British parliament voted on Wednesday to prevent Prime Minister Boris Johnson taking Britain out of the EU without a deal, but he proposed a snap election on Oct. 15, just weeks before Brexit, to free his hands.