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Today, the US dollar approached a two-month high against the euro and all other majors. The US dollar strengthened on news that the US overtakes Europe in terms of economic recovery. The pace of recovery in the United States is much faster than in the EU.
The strong intention of the new US administration to adopt a large-scale stimulus package as soon as possible fuels investor optimism. Meanwhile, in Europe, the possibility of tougher lockdowns is still high amid the rapid coronavirus spread and a new strain of infection. These factors can undermine an already weak economy of the region. Besides, economic forecasts add more pessimism as they predict a decrease in GDP in the euro area for the first quarter. Notably, in the fourth quarter of 2020, the economies of all 19 countries that use the euro contracted by 0.7% compared to the previous quarter. In annual terms, it was a decline of 5.1%. In addition to this, experts fear that in the first quarter of this year, the eurozone will face a sharper recession due to extended quarantine measures. This pessimistic outlook has affected the EUR/USD pair which declined by 0.20%. At the time of writing, the pair was trading near the level of 1.2013.
Meanwhile, the US dollar index rose against a basket of six major currencies at the start of the European session. By the time the article was published, the USDX had gone up by 0.25% to 91.21.
The greenback continues to advance despite a rise in the stock market and improved risk sentiment. This process does not go in line with the usual correlation between currencies and shares. Based on the previous record, analysts say we will again see this correlation in the course of this year. This means that the US dollar will start to decline as global economy recovers.
However, a slower pace of recovery in the European region favors the greenback. Besides, the US currency benefits from the massive closing of short positions, in particular on the yen. For the first time since October 2016, hedge funds had the largest volume of short positions against the US dollar.
It is still likely that the greenback will extend gains in the near future. The report on private sector employment from ADP may support the American currency. According to experts, the data for January will show a notable improvement in the US labor market.
At the same time, the US dollar rally may not last long even despite positive news from the US. Most probably, market euphoria will give way to concerns about the inevitable rise of inflation rate. It is sure to happen as soon as the US authorities approve another fiscal stimulus package, and the Federal Reserve decides to keep interest rates low. All this will put significant pressure on the US currency. The greenback may face a deeper decline compared to the current levels.
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