Dollar Unloved as New Year Offers Recovery Optimism

The dollar weakened Monday, remaining friendless amid expectations that U.S. interest rates will remain low for a prolonged period while hopes grow for a global economic recovery as Covid-19 vaccines are rolled out.

At 3:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.3% at 89.597, not far above a more than 2-1/2 year low of 89.515 made last week. The index dropped more than 7% last year, its first annual loss since 2017.

USD/JPY fell 0.2% to 102.95, after Japan’s Prime Minister, Yoshihide Suga, said his government is mulling a state of emergency in Tokyo as infections rise.

EUR/USD rose 1% to 1.2262, GBP/USD climbed 0.2% to 1.3693, at levels last seen in early 2018, while the risk-sensitive AUD/USD was up 0.2% at 0.7721.

We “remain upbeat on EUR/USD, EM FX and risk assets in general into the start of this year and we don’t really want to question this narrative until the recovery is strong enough for both fiscal and monetary administrations to consider removing the foot from the QE/stimulus-pedal,” said analysts at Nordea, in a research note.

Early signs of the thinking of members of the U.S. Federal Reserve will come with the minutes of the December meeting on Wednesday. These should offer more detail on discussions about making the central bank’s forward policy guidance more explicit and the chance of a further increase in asset buying this year.

The data calendar includes the release of a number manufacturing surveys across the globe later Monday, but most eyes will be on Tuesday’s Senate run-offs in Georgia, which will determine which party controls the Senate. A victory for either of the Republican incumbents would insure their party keeps a narrow majority in the Senate. But if the Democrat candidates win, the dollar could be further weakened by the expected higher stimulus spending pushed by their party and the associated improved market sentiment.

Friday’s official U.S. employment report.will also be present in traders’ minds.

Meanwhile, Britain is set to become the first country to roll out the Covid-19 vaccine developed by AstraZeneca (NASDAQ:AZN) and Oxford University, a cheaper and more easily stored alternative to the vaccine developed by Pfizer and BioNTech, which is already in use.

This will become another step forward in the global response to the pandemic, hopefully shortening the time before some form of herd immunity can be achieved and economies across the globe can reopen.

Elsewhere, the USD/CNY pair fell 1.1% to 6.4632, with the yuan climbing to a 2.5-year high, boosted by the Caixin Manufacturing Purchasing Managers Index coming in at 53 for December, indicating continued growth in the important manufacturing sector. The yuan is also now used as a favored vehicle for shorting the dollar as China’s economic recovery continues.