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* Flat dollar after rebounding on soft European data
* Concerns over COVID-19 variant, vaccines temper mood
* Dollar bears expect Fed to reaffirm its accommodative stance this week
* Chart: Global exchange rates https://tmsnrt.rs/2RBWI5E
By Hideyuki Sano
TOKYO, Jan.25 (Reuters) – The US dollar stabilized on Monday after a recent decline as new concerns over the coronavirus and the global economy prompted investors to hold on to the safe haven currency.
But analysts said the dollar could resume its decline if the U.S. Federal Reserve reaffirms its commitment to highly accommodative monetary policy at its rate meeting later this week – as widely expected.
“I don’t think the Fed has any incentive to cut its stimulus measures at this point, although some market players may try to read between the lines for any signs of reducing stimulus measures,” said Kazushige Kaida, manager. foreign exchange sales at Street Bank’s Tokyo State Branch.
“I think the dollar is still in a downtrend even though it is marking time for now,” he said.
Federal Reserve Chairman Jerome Powell is expected to signal he has no plans to reverse the massive stimulus from the Fed anytime soon when the central bank completes its policy review on Wednesday.
The dollar index stood at 90,172, flat on the day. It rebounded on Friday after hitting 90.043 on Thursday, last week’s low.
Economic activity in the eurozone fell dramatically in January, as strict lockdowns to contain the COVID-19 pandemic hit the bloc’s dominant service sector hard, while UK data showed UK retailers were struggling to recover in December.
British Prime Minister Boris Johnson also said on Friday that there was evidence that a new variant of COVID-19 discovered late last year could be associated with higher mortality, while the problems of some Vaccine deployments also weighed on sentiment.
The pessimistic news from the coronavirus has overshadowed some optimistic US data, including a surge in manufacturing and an unexpected surge in sales of existing homes.
Bets against the dollar have become overcrowded, analysts also said, with U.S. data on Friday showing net short positions in the dollar increased to their highest since May 2011.
The euro was little changed at $ 1.2174, taking a break after gaining 0.8% last week.
The common currency is partly capped by signs of political instability in Rome, which has also pushed Italian bond yields higher. The yield spread between Italian and German bonds reached its highest level since November on Friday.
Italy’s main ruling parties on Friday signaled that snap elections were the only way out of its political deadlock if Prime Minister Giuseppe Conte fails to muster a parliamentary majority after passing a confidence vote.
The situation in Italy demonstrates the widespread risks of political instability due to popular discontent as communities tire of the pandemic, some analysts have said.
“The rally of the stock markets during this pandemic depends entirely on fiscal expansion and monetization of debt by central banks,” said Makoto Noji, chief currency strategist at SMBC Nikko Securities. “Political instability could delay fiscal measures. The year 2021 will not be the same as 2020.”
In Washington, the honeymoon after Joe Biden was inaugurated as president last week means investors are hopeful that at least part of his $ 1.9 trillion coronavirus relief plan will end. will materialize soon enough.
Former US President Donald Trump’s second impeachment trial slated for early next month could complicate his efforts.
Elsewhere, the British pound remained firm at $ 1.3684, not far from a 2-1 / 2-year high of $ 1.3745 reached on Thursday thanks in part to Britain’s lead in vaccinations against COVID-19.
Against the yen, the dollar was stable at 103.76 yen.
(Reporting by Hideyuki Sano; Editing by Sam Holmes and Ana Nicolaci da Costa)
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