Over the last couple of weeks, the US dollar has depreciated by 2.5% against its main counterparts.
The US dollar has been weakening for so long that experts no longer see the decline as the usual correction.
Bloomberg analysts suggest that if USD continues going down, the upward trend that has formed this year may end.
In recent months, investors have been betting on a faster recovery of the US economy compared to the rest of the world. Back then, the so-called "reflation trade" was an important market driver. Today, however, these expectations seem to be fading. Traders begin to focus on an improved economic outlook outside the United States.
The US dollar also lost one of its main support factors. In February and March, large-scale sell-offs of Treasuries boosted demand for the US currency. However, repeated and insistent statements by the Fed about temporary pressure on the price changed the situation in the US debt market slightly.
As a result, the greenback had to retrace to the levels of early March in the region of 90.85
Clearly, the greenback could have depreciated even more if it were not for the continuing gap between the yields on US government bonds and other developed countries, as well as the still growing infection rate worldwide.
"As long as the US treasury threat remains neutralized, we could be set for a significant move lower here in the US dollar, at least a test of the lows. Forward concerns remain, of course – for example how quickly the stimulus sugar rush fades, whether a credit cycle continues to fail to ignite in the US. And of course, there is also the pandemic itself, where the global 7-day average case count just rose to its highest ever, with the case count exploding particularly in India, where a new "double mutant" version of the virus has been reported," Saxo Bank strategists said.
Demand for the greenback slows down. According to ING analysts, the US dollar index may fall below 90.
The strong US macroeconomic data presented earlier failed to support the US dollar. This is an early sign that the US economic recovery has already been included into the price, they noted.
However, there are those who argue that it is too early to write the greenback off.
JPMorgan experts reckon that the dollar's rough patch this quarter amid falling bond yields is a temporary correction against the trend.
They believe that the unique position of the US should provide the main support for the dollar. At the end of April, President Joe Biden is expected to announce the $2 trillion stimulus plan. Meanwhile, a rapid pace of vaccination in the US will help to maintain the existing gap with the rest of the world.
JPMorgan remains bullish about the dollar against the currencies of countries with slow economic growth and whose central banks are likely to keep the dovish stance on monetary policy. The euro is one of such currencies according to JPMorgan.
Mizuho Securities strategists think that the current quarter will become a consolidation period for the US currency.
"The uptrend in US yields and the dollar will resume in the third quarter, when Congress is likely to approve the plan, the US vaccine rollout will be far along and market speculation about a tapering of Fed stimulus will be mounting," Mizuho Securities analyst said.
Optimism that the recovery of the American economy will boost the world economy and the relatively low US yields may become the main obstacles for this scenario.
If Democrats increase corporate tax, debt issuance will decrease in the future and pressure on bonds will ease. Lower bond yields in turn will place the greenback under pressure.
At the start of the week, the correction continued after a breakout of the key technical levels and EUR/USD settled above 1.2000.
Amid a weaker dollar, the euro was supported by positive news about COVID-19 vaccinations in the EU.
By June, the EU will have enough doses to fully vaccinate 70% of the population, the Commissioner for Internal Market said.
Pfizer and BioNTech announced that Europe will receive additional 100 million doses of the vaccine.
Another positive factor for the euro was that Germany's governing conservatives had agreed on a candidate to succeed Chancellor Angela Merkel. A majority of senior party members voted to nominate Armin Laschet, the leader of the CDU.
On Thursday, the ECB will hold a monetary policy meeting. Its outcome may boost the euro.
Investors expect the regulator to keep its policy unchanged and hope for hints about future plans.
The European Central Bank will slow its emergency bond-buying by July and signal at the end of this year that the program will come to a halt in March 2022, according to a Bloomberg survey of economists.
If the regulator sees optimism in the latest eurozone data and speaks less about stimuli, this may lead to the strengthening of the euro.
Since the beginning of April, EUR/USD soared by 3%. On Tuesday, it kept on going up to the monthly high of 1.2075, but then reversed.
The EUR/USD pair broke the key resistance at 1.1992/97. It is expected to rise to 1.2103/13 (the March high and 61.8% retracement of the 2021 fall) and even to 1.2127/30. If the price is above this range, it may go to 1.2243 (the February high), Credit Suisse experts said.
The pair will remain constructive while trading above 1.1990-1.1995. A breakout of this area will lead to a drop towards 1.1946. However, only a breakout below this level will give a false bullish breakout signal and mark the formation of a short-term high, they added.
