Sterling fell to a 10-day low against the dollar and euro, as two-year British government bonds dropped to a record low. Prime Minister Boris Johnson sought an emergency response to the crisis.
The pandemic stress in Europe overshadowed a weekend deal among U.S. congressional leaders for a $900 billion coronavirus aid package.
European stock markets slid, while Wall Street shares sank after most of Europe cut off transport with Britain, sowing chaos for families and companies just days before Britain is scheduled to complete its exit from the European Union.
In midday trading, the dollar index edged 0.1% lower to 90.226, after it sank to two-and-a-half-year lows last week, driven by optimism that vaccines would help to revive global growth.
Earlier in the session, it rose to a two-week high of 91.022. The euro fell 0.2% to $1.2234, after earlier dropping to a 10-day trough.
“Euro/dollar is suffering a pullback with broad risk sentiment…as the world digests what to make of this new strain of COVID-19, which is allegedly 70% more contagious, but we’ve noticed a couple waves of ‘buy-the-dip’ emerge in Europe today and we think this is because today’s pullback is a counter-trend,” said Erik Bregar, head of FX strategy, at Exchange Bank of Canada in Toronto.
The pound slumped 1.3% versus the dollar to $1.3340, while the euro gained 1% against sterling to 91.69 pence.
Unlike the pound, which faces structural challenges when Britain leaves the EU either with a deal or no deal, the euro’s strength isn’t expected to suffer structurally, said Holger Schmieding, chief economist at Berenberg.
He expects the euro to eventually resume its rise towards $1.25. Bitcoin fell nearly 3% after hitting a record high of $24,298.04 on Sunday. The virtual currency was last down at $22,759.
The riskier Australian and New Zealand dollars weakened at the start of the week as investors rushed for haven assets.
The Aussie dollar dropped 0.6% to 75.78 U.S. cents, while the New Zealand dollar fell 0.7% to 70.92 U.S. cents.
The U.S. dollar gained 0.1% against the yen to 103.43 yen.
“I think we will still have a Biden administration that will exercise caution and maintain stricter measures that could limit economic activity,” said Edward Moya, senior market strategist at OANDA in New York.
“We were expecting things to start getting to normal by the end of the first quarter; I think we will have to push everything back.”