US dollar retreats on stimulus hopes

The dollar wilts before the stimulus trade

The US dollar index retreated overnight as markets continued to rotate out of US dollars and into global recovery facing commodity and Asian currencies. The dollar index fell 0.40% to 90.04, leaving it squarely in the middle of its 89.00 to 91.00 two-month range. The euro was unmoved by an unchanged ECB and continues to range trade, awaiting its next directional move. Sterling rose 0.60%, closing just above major resistance at 1.3700 after its vaccination programme’s momentum increased. Sterling is now poised to target 1.3800 and could well receive a Covid-19 “peace dividend” over the coming weeks thanks to its impressive vaccination efforts.

The commodity-linked Australian, New Zealand and Canadian dollars continued to rise overnight, albeit at more modest paces. All three look poised to make more gains but have yet to trace out technical upside breakouts. They remain vulnerable to adverse US Senate developments over the coming days. The Canadian dollar was almost unchanged overnight and looks the weakest of the three, suffering a Keystone XL hangover and the possibility of oils correction lower extending into next week.

The story is much the same in the Asian currency space, with regional currencies ground higher, albeit with less momentum than previous days. In Asia today, most have actually retreated slightly, with investors rotating into haven US dollars ahead of the weekend.

Although the US dollar short squeeze has disappeared in the noise of the Biden stimulus euphoria this week, it could stage a prodigal return next week if cracks in the US Senate widen for Biden.

More notably, the hoped-for bipartisanship in the US Senate appears to be showing the cracks of reality already. With the Senate split on a 50-50 basis, it is not a major surprise that we are seeing fault lines begin to emerge along party lines. Reuters is reporting that the President’s immigration reforms are facing resistance already and we could see the Republicans mount resistance and spoil Biden’s party.

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