Dollar to snap two-week winning streak

by Jonathan Adams
Dollar

The U.S. dollar index rose 0.09% to 90.21

The dollar is set to snap a two-week winning streak on Friday, but will likely find support over the next few months before resuming its trend lower, experts said.

The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, rose 0.09% to 90.21.

The weekly slip in the dollar comes ahead of a busy week, with inflation, economic data and the Federal Reserve on the economic calendar.

The Federal Open Market Committee is likely to provide a more optimistic outlook on the economy in the wake of fiscal stimulus that it has deemed as critical to the recovery.

A much more positive assessment of the economic outlook by the committee would likely give a boost to U.S. yields and thus also to the U.S. dollar, Commerzbank said in a note.

The economy meanwhile is expected to show strong growth for the fourth quarter, further fuelling hopes “for a quick recovery and support the dollar,” the bank added.

But looking ahead, the dollar is likely to reverse course and trend lower, as its boost from rising bond yields is transitory, with upside in rates expected to be capped by a prolonged period of ultra-loose monetary policy conditions.

The 10-2 Year Treasury Yield Spread curve – the difference between the 10-year treasury rate and the 2-year treasury rate – that serves as a gauge of the health of the economy has been steepening, pointing to growing optimism over the recovery.

Once yields have stabilized, the U.S. dollar is also likely to run out of steam. Instead, the focus is likely to turn to longer-term risks, which is why we continue to expect EUR-USD trade at higher levels by the end of the year, Commerzbank said.



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