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The U.S. dollar is beginning 2021 with a bounce, despite a consensus view for the currency to extend last year's selloff.
The ICE U.S. Dollar Index a measure of the currency against a basket of six major rivals, is up 0.6% so far this week, contributing to a 1.3% bounce since the end of last year, when it finished near a 2 1/2-year low. The index is down around 12% from levels seen last February and March, when a pandemic-inspired scramble for greenbacks pushed the index to its highest level in more than three years.
U.S. dollar (USD) "bears are beside themselves but still holding on to the notion that this is a countertrend rally and the USD down move will continue again soon," wrote Brad Bechtel, global head of FX at Jefferies in a Tuesday note.
"We of course, adamantly disagree," said Bechtel, who has argued for a dollar rally. He's looking for a push by DXY back through resistance at the 50-day moving average, with 91.933 seen as the next target.
Much of the focus is on the euro which accounts for around 58% of the weighting of the DXY. The euro had surged to a 2 1/2-year high above $1.23 versus the dollar last year - and its strength has rattled the European Central Bank. According to reports, the ECB is investigating whether differences in stimulus policies between it and the Federal Reserve account for some of the euro strength.
Problems with coronavirus vaccine rollouts in Europe along with ideas the ECB could move to cut interest rates or take other actions aimed at damping the euro's rise have been cited for a pullback by the shared currency, which has retreated around 1.6% since the end of last year, changing hands Wednesday at $1.2025.
Dollar bears didn't necessarily appear rattled, however.
"While lockdowns will mean that Europe lags, we still expect this region to nonetheless participate in recoveries from 2Q onwards - likely led by strong growth by the U.S. and China," wrote analysts at ING, led by Chris Turner, the Dutch bank's global head of markets.
"As long as those recovery expectations hold up - and crucially the Fed sticks to its new policy strategy of allowing the economy to run hot - the dollar should weaken," they wrote.
As for the euro, they still expect it to press the $1.25 level this summer despite ECB threats to cut interest rates, while broad global economic growth later in the year could allow a push above that level.
The dollar is seen weakening amid a global pickup in economic growth, while a bumpier ride or chaos in financial markets tends to provide support. While a stronger euro makes life difficult for ECB policy makers by holding down inflation that remains stubbornly below the bank's target, a weaker dollar is generally seen as a positive for the U.S. and global economy, easing financial conditions, as it works its way out of the pandemic.