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USD Near to Two Month High

February 3, 2021

The US dollar traded near a two-month high against the euro on Wednesday as investors looked to a widening the gap between the strength of the US and Europe’s pandemic recoveries.

The view was bolstered by moves in Washington toward fast-tracking more stimulus spending that contrasted with concerns about extended European lockdowns and expectations for a decline in euro zone growth for Q1. The EUR/USD pair held firm at $1.2038 early in the Asian session, after strengthening to $1.20115 overnight for the first time since December 1st 2020.

The US dollar index (DXY) was mostly flat at $91.081 after rising to a two-month high of $91.283 in the previous session. The dollar’s advances come despite a rise in equities amid improving risk sentiment, defying the currency’s historic inverse directional relationship with stocks.
Many analysts expect the correlation to return as the year progresses, and for the dollar to decline as global growth recovers amid massive fiscal stimulus and ultra-easy monetary policy.

The dollar also benefited from a massive bout of short-covering, especially against the yen where hedge funds had racked up their biggest short bets against the USD since October 2016. The USD/JPY pair was little changed at ¥105.025 after gaining to ¥105.17 overnight for the first time since November 12th 2020.

Many see the dollar’s rebound since early last month as a correction after its relentless decline last year, although some think the dollar’s new-found firmness could reflect a retreat of the bearish sentiment on the currency. The DXY has rebounded 1.2% this year after an almost 7% decline in 2020.

Many analysts believe that the bear trend we are currently witnessing is facing a short-term stress test. Without short-term yield support there’s a limit to how far US recovery optimism can boost the USD. Global reflation and the Fed’s determined dovish stance will limit upside potential for now.

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