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FOREX-Dollar reaches one-month highs as markets eye Biden's FX policy

Published 18/01/2021, 16:13
Updated 18/01/2021, 16:18
© 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, reaching a four-week high, as
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 established ranges, watching
carefully the new administration's stance on the currency.
Outgoing President Donald Trump has publicly railed against
the dollar's strength for years, but 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 fuelled a rise in U.S. Treasury yields and reversed a late
2020 fall in the value of the dollar.
"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 edged 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 dollar basket rising
nearly 2% so far this year thanks to a 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 get 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 $1.2054. The
Antipodeans were soft with the Aussie AUD=D3 hitting a
one-week trough of $0.7659 and the kiwi NZD=D3 at a three-week
low of $0.7097. AUD/
Better-than-expected Chinese economic data headed off
further weakness among riskier currencies, but that was not
enough to shift currency traders' mood. 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 to stay in 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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