The dollar index recovered from the six-week low. Investors shifted their focus to expectations on US Fed chief Jerome Powell’s response to resurgent inflation. Meanwhile, commodity-linked currencies reached multi-year highs.
Investors bet on economic recovery, and it has lifted the US bond yields.
The dollar index stood last at 90.143, up 0.1% on the day. Earlier, it dropped to 89.941, its weakest since Jan. 13. The key 2020-2021 support line is located below the 90.00 level.
The psychological support stands at 90.00. A break below this zone should open the door for a likely move towards the 2021 lows around 89.20. After that level, it targets the March 2018 low at 88.94.
Meanwhile, occasional periods of bullish pressure in the DXY index are seen as only corrective amid the broader bearish view around the dollar. That said, bullish attempts to the 91.00 region and beyond could represent short opportunities in the current context.
Analysts expect Powell to reassure that the Fed will tolerate higher inflation without hurrying to raise rates. Analysts believe that might calm bond markets and weigh on the dollar finally. They think Powell will repeat that it will take some time before the Fed meets its goals and sufficient progress has been made to reduce its bond purchase program.
The dollar has been decreasing since last March. Investors are overwhelmingly betting that the dollar will keep falling as the world
overcomes the coronavirus pandemic.
ING analysts stated that the US dollar would only experience an overall strength when the spike in US yields becomes more disorderly and spills forcefully into risk assets.
Commodity-linked currencies – best performers of the year
Meanwhile, the euro has dropped by 0.1% to $1.2151.
Eurozone government bond yields have also been rising. However, after Christine Lagarde, ECP president, said that the bank was closely monitoring rising borrowing costs, the rally took a brief pause.
Among the best performers of 2021 have been commodity-linked currencies such as Canadian, Australian, and New Zealand dollars. Increasing prices for commodities like oil and copper, lumber, and milk powder have supported these currencies to their highest in roughly three years.
Meanwhile, Sterling surged to a new nearly three-year high. The currency increased 0.3% on the day and traded at $1.4098. Investors stuck with their bets that a speedy rollout of the coronavirus vaccine would allow the British economy to revive over the next few months.
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