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FOREX-Dollar at 1-month highs as markets eye Biden's FX policy; euro slips

Published 18/01/2021, 12:36
Updated 18/01/2021, 12:42
© Reuters.

© Reuters.

* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E

By Saikat Chatterjee
LONDON, Jan 18 (Reuters) - The U.S. dollar strengthened for
a third consecutive day on Monday to a four-week high as an
undercurrent of risk aversion swept through currency markets,
knocking the Australian dollar and the British pound lower.
With U.S. markets shut for a holiday on Monday and Joe Biden
set to be inaugurated as the next U.S. president on Wednesday,
major currencies remained within well-worn ranges, watching
carefully the new administration's stance on the greenback.
While outgoing President Donald Trump has publicly railed
against the dollar's strength for years, Janet Yellen, Biden's
pick to take over the U.S. Treasury, is expected to make clear
that the United States does not seek a weaker dollar, according
to the Wall Street Journal. Moreover, Biden's plan for a $1.9 trillion stimulus package
has also fuelled a broad-based rise in U.S. Treasury yields and
reversed a late 2020 fall in the value of the greenback.
“I would expect differences in fiscal stimulus to be a
driving force for relative performance of currencies this year
as it is directly linked to the economic recovery story,” said
Wouter Sturkenboom, an investment strategist at Northern Trust
Asset Management.
The dollar index =USD drifted higher to a one-month high
and last traded at 90.94, its highest level since Dec. 21.

After a dollar selloff last year, the opening weeks of 2021
have seen a reversal of fortunes with a broad dollar basket
rising nearly 2% so far this year thanks to a broad-based rise
in U.S. Treasury yields, though analysts remain wary about the
short-term outlook.
"History suggests a strong seasonal pattern that points to
the potential for further near-term strength but this seasonal
bias might prove less forceful this year given the broad macro
backdrop remains consistent with continued optimism and support
for risky assets," MUFG strategists said in a weekly note.

NEGATIVE BETS
The dollar's gains might also receive support from an
unlikely source.
Weekly positions in the currency markets show that hedge
funds have piled up a massive net short dollar position of
$34.04 billion in the week ended Jan. 12, the largest short
position since May 2011.
Such large positions suggest that traders would be
relatively more inclined to reduce their positions than add to
already large bets. Derivative markets also point to some dollar
strength in the short term.
The euro EUR=EBS dipped to a six-week low of $1.2066. The
Antipodeans were soft against the greenback with the Aussie
AUD=D3 hitting a one-week trough of $0.7679, while the kiwi
NZD=D3 was at a three-week low of $0.7117. AUD/
Better-than-expected Chinese economic data headed off
further weakness among riskier currencies, but was not enough to
shift currency traders' mood decisively. The mood soured after Friday's data showed U.S. retail sales
fell for a third straight month in December, stoking worries
that the recovery is running into trouble as health authorities
warned that the worst of the latest COVID-19 wave might be yet
to come. Europe is also facing surging cases and an Italian
government that must survive crucial votes in parliament on
Monday and Tuesday in order to cling to power is also making
some traders nervous.


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World FX rates https://tmsnrt.rs/2RBWI5E
FX market positions https://tmsnrt.rs/3iumAi7
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