Stimulus weighs on US dollar

The US dollar falls in the face of stimulus-mania

Overnight, the Biden-stimulus vaccine powered global recovery rally continued unabated, with Wall Street hitting record highs, the US dollar falling. With no data of note to distract, the overnight price action looked very much a rinse repeat the Friday session sans the dollar weakness.

The buy everything trade is back with a vengeance for now, and I shall not argue with the speculative momentum. Only Chinese and US inflation numbers released tomorrow could distract markets. Unless US inflation surprises to the upside, the distraction will only be temporary. We are all back to stimulus and vaccine watching.

The US dollar retreated overnight as global recovery hopes squashed the short squeeze. The dollar index fell back through support at 91.00, finishing 0.12% lower at 90.93, and has continued south this morning, falling 0.22% to 90.73.

That has lifted EUR/USD through resistance at 1.2060, to 1.2078 today, the single currency rallying 0.28% today. The beleaguered Australian dollar has also caught the recovery waves. It rose 0.30% overnight and has climbed another 0.37% to 0.7728 this morning, well clear of channel support at 0.7630. Both sterling and the New Zealand dollar proved immune to recent US dollar strength and are over 0.30% higher today, and poised it seems for more gains this week. Notably, GBP/USD is eroding January resistance at 1.3760, which should open a vaccine-driven challenge of 1.4000 in the coming week.

USD/CNY fell 0.35% overnight to 6.4500, and most regional Asian currencies have risen this morning in sympathy. Running into the Lunar New Year break, the PBOC’s seeming intent to keep USD/CNY between 6.4000 and 6.5000 is running nicely to plan. With most of Asia shutting down for Lunar New Year, liquidity will steadily erode in Asia, where trading appears muted already today. That will leave those markets that are still open, vulnerable to headline-driven, temporary volatility spikes.

Looking forward, US dollar weakness should now continue this week, unless inflation in the US prints markedly higher tomorrow.

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