Experience shows that it could be quite costly to maintain a bearish stance when it comes to the US dollar. Market players should always be aware of signals for a possible reversal. One of them is coming from the growing Treasury yields. Recent political events in the United States and the victory of Democrats have contributed to the rise in yields. On Tuesday, the growth of 10-year government bonds reached a 10-month high. This rally is unlikely to end at this point. Thus, Commerzbank assumes there could be a new round of growth in Treasury yields.
"There is still high upside potential, especially after the US dollar depreciated by at least 10% against all other majors last year," currency analysts say.
Another factor to support the greenback may be the reluctance of the US Federal Reserve to increase QE.
"If fiscal support makes the Fed less willing to ease the monetary policy, the US dollar will continue to strengthen," experts added.
Notably, Atlanta Federal Reserve President Raphael Bostic mentioned that a reduction in bond purchases is possible. It was not easy for the USD sellers to hear about the regulator's plans to cut purchases at the end of 2021.
"A lot of it will depend on how the virus and the vaccine distribution goes; but if it goes well, if we learn quickly, I think that there's some good upside potential there for the economy, and Fed policy will need to react to that," Bostic said during the online conference.
Five FOMC members are scheduled to give a speech today. The officials should clarify the Fed's view on the market situation and further plans for QE. They will most likely respond without enthusiasm to Bostic's comments and will probably oppose any proposal to cut monetary stimulus.
Some analysts are confident that the bearish trend on the US dollar will continue. Experts at Citigroup say they still adhere to the selling strategy on the US currency as dollar assets look "expensive".
On Tuesday, the rally of the US dollar index has lost its steam after USDX climbed above 90.6 on Monday. The greenback remained at around 1.2150 against the euro.
Meanwhile, the British pound has recovered from yesterday's fall and almost completely made up for the previous losses. However, the uptrend of the British currency may be limited at least until the Bank of England stops considering the idea of negative interest rates.
The central bank officials reported on Monday that additional stimulus may be needed to support the economy. It is not yet clear whether the regulator will resort to such measures. But as long as the idea of negative rates is being discussed, the pound will remain under pressure.
