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Trend change in sight? The dollar goes from a safe haven currency to a risk asset

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The dollar has shown that it is willing to defy all predictions about its weakness in 2021 and all the bears in the market that are still stacked, waiting for the US currency to resume the depreciation trend that was late last year. The The US currency closed its best week in several months in February in the index that measures its performance and it seems that it is on its way to the change of $ 1.18 against the euro, but the question that looms over the market is whether it is a change in trend or is it just an adjustment of its fall in the 7% in 2020.

Analysts and operators weigh whether this turn of the ‘greenback’ is going to last in time and look for the reasons that seem to lie, according to ‘Bloomberg’, in which “the growing hopes for the economic recovery of the United States are transforming the dollar from a safe haven asset to a risk currency”. In this sense, the tensions in the US Congress over President Joe Biden's stimulus proposal of 1.9 trillion dollars against Covid-19, add up to the short-term upward movement, since “the headlines about the agreement stimulus packages support the greenback narrative from the back burner, ”Monex Europe experts write.

The dollar's turnaround is calling into question the Wall Street consensus that a strengthening recovery would weigh on safe-haven assets like the dollar. Everything indicates that the opposite is happening, since the perspective of a more generous public spending in the US and rising Treasury yields have encouraged the currency.

However, it is still too early to define a trend, and hedge funds and asset managers remain bearish, according to aggregate data from the Commodity Futures Trading Commission. There are potentially a lot of dollar shorts to hedge, particularly against the yen where hedge funds had accumulated their biggest bearish bets since 2016, part of the gains in the US currency due to a timid movement of these funds.

"The US economy is exceptionally strong relative to other countries, which causes the hedging of short positions in the dollar, "says Tohru Sasaki, head of market research at JP Morgan, pointing to employment and manufacturing indicators, as well as the pace of vaccines.

"The dollar seems overbought, but the optimism towards the currency prevails," says Toshiya Yamauchi of Ueda Harlow. Traders are "ignoring the bad catalysts for the dollar, but diving into the good ones."

The current streak of dollar strength could last for "several weeks"Sasaki adds, but the outlook is murkier thereafter as Europe and Asia are expected to catch up on immunizations and the Federal Reserve's ultra-soft monetary policy continues to limit the rise in long-term US yields. .

However, Bank of America analysts also raise their voices to note that there is "a growing risk of a strengthening dollar in the medium term, next year very late. "" We also expect that there will be more divergences within the G10, and that the pace of vaccines and the reopening will play a fundamental role, "they add." Growth forecasts are especially bullish for the dollar / Swiss franc ", they warn.

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