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Dollar Drops as Traders Prepare for Inflation Data

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The dollar slipped on Monday towards a three-week low as Treasury yields traded near recent lows and traders awaited crucial U.S. inflation and retail sales data in coming days.

Elsewhere, it was a quiet start to a data-heavy week for foreign exchange markets. The euro climbed back above $1.19 while the British pound rebounded from a two-month low.

The dollar’s performance has been tied to U.S. Treasury yields for most of 2021, after concern about rising inflation in the United States and a stimulus-fueled economic rebound triggered a jump in Treasury yields in February.

A fall in U.S. yields last week triggered the worst week for the dollar in 2021. With yields inching lower on Monday, it was back under pressure.

Federal Reserve Chairman Jerome Powell said in a U.S. media interview released on Sunday that the U.S. economy was at “an inflection point” and looked set for a strong rebound in the coming months, but he also warned of risks stemming from a hasty re-opening.

Investors are now waiting for U.S. March inflation data due on Tuesday.

“We are set to see the first evidence of the much anticipated surge in inflation that is widely expected through the coming months as base effects from a year ago begin to take effect as the sharp declines post-COVID start to fall out of the annual calculations,” MUFG analysts said.

They said the dollar’s fortunes could well “remain linked to 10-year yields”.

The benchmark 10-year Treasury yield was at 1.664% after dropping to as low as 1.6170% last week. It had surged to a more than a one-year high of 1.7760% on March 30.

The dollar index, which measures the U.S. currency against a basket of currencies, weakened 0.2% to 92.03. The euro initially dropped but later recovered and was up 0.1% to $1.1915.

Bitcoin traded above $60,000, closing the gap to its record high.

Against the pound the dollar initially gained before reversing course. The British currency was last up 0.5% at $1.3763 after briefly touching a two-month low of $1.3669 as traders cheered the latest phase of the government’s economic re-opening plan.

The dollar fell 0.3% to 109.33 yen versus the Japanese currency.

U.S. dollar net short positions have fallen to their lowest in nearly three years, according to data published on Friday.

ING analysts noted that speculators had cut their net short dollar positions for the 12th consecutive week, which could prove a headwind for further dollar gains.

“At this stage, the dollar has lost all its positioning “advantage”, having a neutral speculative positioning, which suggests we should no longer see dollar rallies against most G10 currencies exacerbated by the unwinding of USD shorts,” they wrote.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

US Dollar

Dollar Falls as Risk Appetite Improves, Sterling Dips on BoE

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The dollar dropped to its lowest point in three days on Thursday as global market risk appetite improved, while sterling zig-zagged after the Bank of England slowed the pace of its bond-buying, but left interest rates unchanged.

Fewer Americans filed new claims for unemployment benefits last week, data showed, as COVID-19 vaccination efforts and massive amounts of government stimulus led to a further reopening of the economy.

While the U.S. economy has been gaining steam, Federal Reserve speakers on Wednesday downplayed the risks of higher inflation.

Those statements reinforced “the lower-for-longer mentality with regards to interest rates,” making the greenback less appealing, said Neil Jones, head of FX sales at Mizuho.

The safehaven U.S. dollar was last down 0.31% at 91.977 against a basket of peer currencies.

“What we’ve seen early in New York is a little bit of back-and-forth gyrations, just because of the Bank of England meeting,” said Erik Bregar, director and head of FX strategy at the Exchange Bank of Canada.

The Bank of England said it would slow the pace of its bond-buying as it sharply increased its forecast for Britain’s economic growth this year after its coronavirus slump, but it stressed it was not tightening monetary policy.

“They kept their QE target in place but they said they are going to reduce the weekly pace of purchases, but that’s not a signal and so sterling has kind of gone up and down and done nothing at the end of the day,” Bregar said.

The pound was last down 0.08% against the weaker dollar at $1.3900 .

The euro was up 0.47% versus the dollar at $1.2061 , and up 0.65% against the pound, at 86.88 pence per euro.

Investors were also paying attention to elections in Scotland that could herald a political showdown over a new independence referendum.

The Australian dollar fell sharply overnight when China said it would stop its economic dialogue with Australia, but the currency had recovered to trade close to flat on the day as European markets opened.

The Aussie was up 0.1% versus the U.S. dollar at 0.77515 at 1028 GMT, having hit as low of 0.7701 overnight.

The New Zealand dollar also dropped and was down 0.1% on the day.

“The announcements of the formal suspension of the economic dialogue between China and Australia should not have a lasting impact on markets given the already strained relationship between the two ahead of the event,” wrote ING strategists in a note to clients.

The Canadian dollar hit a three-and-a-half year high, helped by oil price gains and the Bank of Canada’s recent shift to more hawkish guidance.

In cryptocurrencies, ether traded around $3,500 after reaching a record high of $3,559.97 on Tuesday, skyrocketing nearly 800% this month.

Bitcoin declined 0.2% to $57,392.75.

The meme-based virtual currency Dogecoin soared on Wednesday to an all-time high, extending its 2021 rally to become the fourth-biggest digital coin.

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CBN Warns Against Rejection of Old and Lower US Dollar Bills

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The Central Bank of Nigeria (CBN) on Tuesday has warned both the Deposit Money Banks (DMBs), Bureau De Changes and other forex dealers against rejecting old and lower US dollar denominations.

In a circular dated April 9th, 2021 and signed by Ahmed B. Umar, Director, Currency Operations Department, CBN, the apex bank said it has received several complaints from members of the public on the rejection of old and low denominations of US Dollar bills by authorised forex dealers operating in the country.

The CBN, therefore, mandated all DMBs/authorised forex dealers to accept both old series and lower denominations of United States Dollars (USD) that are legal tender for deposit from their customers.

The leading bank added that it will not hesitate to sanction any DMB or other authorised dealers who refuse to accept old series and lower denominations of US dollar bills from their customers.

Also, the apex bank warned all authorised dealers to desist from defacing and stamping US Dollar Banknotes as such notes always fail authentication test during processing and sorting.

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Bank of America Says US Dollar Will Strengthen Throughout 2021 For 5 Key Reasons

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Bank of America Says US Dollar Will Strengthen Throughout 2021 For 5 Key Reasons

Uncertainties surrounding the US dollar’s path in 2021 are fading and bulls might finally have their day in the sun, Bank of America said Tuesday.

Strategists led by Athanasios Vamvakidis boosted their forecast for the US currency on Tuesday, expecting it to strengthen to 1.15 dollars per euro by the year-end. The forecast compares to Wall Street’s consensus of a 1.25 exchange rate.

A higher euro-dollar rate means a weaker greenback, as more of the US currency can be purchased with a single euro. The currency pair already trades at the bank’s first-quarter forecast of 1.20, down from roughly 1.23 at the start of the year. The team already expected upside for the dollar later in the year, but now sees several reasons why such strengthening can arrive sooner.

Detailed below are the five reasons Bank of America expects the dollar to strengthen in 2021.

The Fed-ECB gap

After taking several actions to pump dollars into the struggling US economy, the Federal Reserve is starting to near the end of its ultra-easy policy stance. Some officials have started talking about tapering the central bank’s asset purchases. The Fed quickly rebuffed concerns of premature tightening, but the mixed communication suggests policy normalization could arrive early next year, the strategists said.

It’s a different story on the other side of the Atlantic. The European Central Bank has taken on more intense rhetoric against Euro strength in recent weeks. A strategic review of how the bank can reach its inflation target will likely reveal new tools for adding Euros to the economy.

“The bottom line is that the ECB will be moving towards more easing, while the Fed will be looking towards policy normalization,” the team said.

Stimulus boost

The Biden administration continues to move toward passing its $1.9 trillion stimulus proposal without Republican support in a bid to supercharge the US economic recovery. While such a large fiscal relief package does weaken the dollar somewhat, it also increases the risk of earlier policy normalization by the Fed, the strategists said. In all, the measure should support the dollar’s strength, they added.

Fiscal policy in the European Union, however, is “not as supportive and if anything could be tightened too early,” the team said.

Faster growth

The global economy is expected to rebound in 2021 as widespread vaccination brings an end to the coronavirus pandemic. Still, Bank of America’s strategists expect US growth to handily outpace that of the EU.

The team projects growth of 6% in 2021 and 4.5% the following year, exceeding the consensus estimates of 4.1% and 3.5%, respectively. EU growth is estimated to reach 2.9% this year and 3.4% in 2021, the strategists said.

Inflation in the US is projected to similarly come in above price growth in the EU.

The US’s decoupling from the EU economy should support the dollar as US spare capacity fades and the rates market prices in early Fed normalization, the team said.

Dollar shorts

The dollar could be the next asset to face a massive short squeeze following the GameStop phenomenon in January, Bank of America said. The market continues to short the dollar despite the currency’s recent rally.

If the team’s projections are right and the US economy outpaces the EU’s, selling of the euro-dollar trade will likely cut into long positions and strengthen the dollar, the strategists said.

Return of the safe haven

The risk-on party that’s lifted stocks through the year-to-date won’t last forever, and a reversal stands to push more investors into cash positions, the team said. Bank of America expects positioning in risk assets to peak in the first quarter before policy support hits its limit the following quarter. A 10% market correction is forecasted to arrive sometime this year and shake investors’ appetite for stocks, they added.

Starting the year with assets at record highs “does not leave much room for further upside,” the bank said. The relatively slow pace of global vaccination means it could take years to fully emerge from the COVID-19 crisis. Realization of the long path to recovery should prop up the dollar in the near term, according to Bank of America.

“A more challenging outlook for risk assets this year also suggests a less clear foreign-exchange picture and upside USD risks,” the strategists said.

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