After reaching two-month highs last Friday (around 91.6 points), the greenback turned down sharply.
The weak US employment report for January highlighted the ambiguous economic outlook in the US and made market participants question the justification for the recent USD rally.
At the same time, the euro, which seemed to have lost its positive impulse, is again in demand among investors.
While the epidemiological situation in the EU is improving across the board, national governments have been slow to ease restrictions. COVID-19 vaccination rates in the region are still low, and concerns about the UK and South African strains of the virus indicate that eurozone countries that were among the first to tighten quarantines may be among the last to weaken them. In this regard, the euro looks like a potential outsider among the G10 currencies. However, in the current environment, when the global equity markets continue to grow steadily, the least resistance path for EUR/USD is the way up.
On Wednesday, the USD index sank to 90.25 points for the first time this month, experiencing a third straight day of losses. At the same time, the main currency pair reached the highest levels since the end of January, rising above 1.2140.
Traders expect the global economy to recover from the pandemic this year and are betting that new fiscal stimulus, combined with record-low US interest rates, will help weaken the US dollar.
"After the January report on the US labor market, which turned out to be weaker than previously predicted, the markets have raised expectations of the imminent adoption of a new fiscal stimulus package in the country. The move is expected to support the low real rate in the United States, that is, the inflation-adjusted interest rate. And this implies that the argument about the dollar's decline remains valid," said ING.
The bank's experts admit that the greenback may fall after the adoption of the next fiscal stimulus in the United States. At the same time, they believe that any strengthening of the euro against the US dollar will be insignificant.
"The USD is under constant pressure from the Fed's ultra-loose monetary policy, which keeps interest rates low. However, the euro still has its own problems, so it will not be able to take full advantage of the general weakness of the dollar," said ING.
The recent rally in the US dollar did not eliminate the bears. Net short positions in USD are still close to their highest values since 2011.
While there remains a consensus among speculators on the dollar's decline rates, Bank of America strategists warn that the greenback is likely to rise this year, given the more challenging outlook for risky assets.
They predict that the euro will fall to 1.1500 against the US dollar by December.
"We expect the Fed to start tightening monetary policy, while the ECB will continue to pursue an ultra-loose monetary policy. According to our estimates, the US economic recovery will outpace the growth of the eurozone economy. In addition, there will be a reduction in speculative short positions in the dollar," BofA analysts said.
Nordea specialists also believe that the ranks of dollar "bulls" may replenish in the foreseeable future.
"The dollar could again deceive consensus forecasts and strengthen, instead of falling in price in 2021," they said.
