The dollar fell for a third straight session on Thursday (Jan 21) as investors sought higher-yielding currencies as a string of stronger-than-expected US economic data and continued optimism about a massive stimulus package stoked hopes of a recovery in the world’s largest economy.
On the other hand, the euro remained broadly strong against the dollar despite ECB President Christine Lagarde’s warning of a new surge in the novel coronavirus infection and a prolonged blockade that could challenge the region’s economic outlook.
The ECB, which held rates steady on Thursday, also promised to provide more support to the economy if needed.
Currency markets reacted little to Lagarde’s comments as market participants continued to focus on what appeared to be an improving outlook for the global economy and the nearly $2 trillion stimulus plan proposed by the new Democratic administration of President Joe Biden.
U.S. economic data on Thursday showed the economy is slowly gaining some momentum, with jobless claims slightly better than expected, housing starts upbeat and a rise in the mid-Atlantic region’s manufacturing index.
“Optimism on economic growth is running high across asset markets, and I think that’s appropriate,” said Anujeet Sareen, Global fixed income portfolio manager at Brandywine Global Investment Management in New York.
He added: “We think the dollar will weaken because global growth will pick up, the trade balance is deteriorating and the Fed will keep monetary policy accommodative.”
In times of global economic expansion, when investors tend to take on more risk, the dollar typically falls against other major currencies.
In late afternoon trading, the dollar index closed at 90.08, down 0.43 percent, after hitting as high as 90.49 and as low as 90.05. It hit a near one-month high of 90.956 on Monday.
The euro rose 0.5 per cent to 1.2167 against the dollar and also gained 0.5 per cent to 125.92 yen.
Still, Mark McCormick, global head of foreign exchange strategy at TD Securities, said the euro could weaken against the dollar as vaccination plans in the euro zone lag behind those in the United States.
“These delays lead to prolonged herd immunity. The downside for markets is that it could also have a direct impact on liquidity and growth trends.”
The U.S. dollar also fell against currencies linked to commodity prices, such as the Australian, Canadian and New Zealand dollars.
Mark McCormick, head of global currency strategy at TD Bank in Toronto, said the vaccine race was a “major wild card” that could drive G10 currencies this year, with the dollar likely to have an advantage as the United States is set to vaccinate faster than other economies. The US “is likely to reach a threshold of 15 per cent by the end of April” and Germany looks likely to reach a similar rate, but other eurozone countries “will be well behind”. This is one reason we are bearish on EUR/USD and recommend shorting EUR/USD at 1.22, where we expect the pair to fall below 1.20 over the next month or so. USDCAD is expected to remain in the 1.25-1.30 range early this year, but could fall below 1.25 later in 2021.
On the political front, Republican U.S. Rep. Marjorie Taylor Greene said Tuesday that she has filed articles of impeachment against President Joe Biden, shortly after he was sworn in, The Hill reported. The document, which the newspaper has not yet obtained, details any impeachable offenses Biden has committed, the report said. But Green says the documents accuse Biden of abusing his power when he was vice president by allowing his son Hunter to take a job at an energy company in Ukraine.
Trend analysis of major currencies:
EUR: EUR/USD turned positive to close at 1.2167, up 0.53%. Technically, initial upside resistance stands at 1.2187, further resistance at 1.2213, key resistance at 1.2256; Initial downside support at 1.2119, further support at 1.2076 and more critical support at 1.2050.
GBP: Sterling rose for a third straight day against the dollar to close at 1.3733, up 06.2%. Technically, initial upside resistance stands at 1.3769, further resistance at 1.3808, key resistance at 1.3870; Initial downside support at 1.3669, further support at 1.3607 and more critical support at 1.3569.
JPY: The dollar fell for the second day in a row to close at 103.48, down 0.04%. Technically, initial upside resistance stands at 103.66, further resistance at 103.83, key resistance at 103.99; Initial downside support is at 103.31, further support at 103.14, and more critical support at 102.97.