Dollar at 1-month highs as markets eye Biden's FX policy; euro slips

LONDON: The US dollar strengthened for a third consecutive day on Monday to a four-week high as an undercurrent of risk aversion swept through currency markets, knocking the Australian dollar and the British pound lower.

With US markets shut for a holiday on Monday and Joe Biden set to be inaugurated as the next US president on Wednesday, major currencies remained within well-worn ranges, watching carefully the new administration's stance on the greenback.

While outgoing President Donald Trump has publicly railed against the dollar's strength for years, Janet Yellen, Biden's pick to take over the US Treasury, is expected to make clear that the United States does not seek a weaker dollar, according to the Wall Street Journal.

Moreover, Biden's plan for a $1.9 trillion stimulus package has also fuelled a broad-based rise in US Treasury yields and reversed a late 2020 fall in the value of the greenback.

"I would expect differences in fiscal stimulus to be a driving force for relative performance of currencies this year as it is directly linked to the economic recovery story," said Wouter Sturkenboom, an investment strategist at Northern Trust Asset Management.

The dollar index drifted higher to a one-month high and last traded at 90.94, its highest level since Dec. 21.

After a dollar selloff last year, the opening weeks of 2021 have seen a reversal of fortunes with a broad dollar basket rising nearly 2% so far this year thanks to a broad-based rise in US Treasury yields, though analysts remain wary about the short-term outlook.

"History suggests a strong seasonal pattern that points to the potential for further near-term strength but this seasonal bias might prove less forceful this year given the broad macro backdrop remains consistent with continued optimism and support for risky assets," MUFG strategists said in a weekly note.

NEGATIVE BETS

The dollar's gains might also receive support from an unlikely source.

Weekly positions in the currency markets show that hedge funds have piled up a massive net short dollar position of $34.04 billion in the week ended Jan. 12, the largest short position since May 2011.

Such large positions suggest that traders would be relatively more inclined to reduce their positions than add to already large bets. Derivative markets also point to some dollar strength in the short term.

The euro dipped to a six-week low of $1.2066. The Antipodeans were soft against the greenback with the Aussie hitting a one-week trough of $0.7679, while the kiwi was at a three-week low of $0.7117. AUD/

Better-than-expected Chinese economic data headed off further weakness among riskier currencies, but was not enough to shift currency traders' mood decisively.

The mood soured after Friday's data showed US retail sales fell for a third straight month in December, stoking worries that the recovery is running into trouble as health authorities warned that the worst of the latest COVID-19 wave might be yet to come.

Europe is also facing surging cases and an Italian government that must survive crucial votes in parliament on Monday and Tuesday in order to cling to power is also making some traders nervous.