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* Chart: global exchange rates tmsnrt.rs/2RBWI5E
LONDON, Feb.5 (Reuters) – On Friday, the dollar was heading for its best weekly gain in three months, on growing confidence that the US economic recovery will outpace that of its global peers.
The dollar index hit a two-month high in Asian trade amid signs of resilience in the labor market, with non-farm payrolls in the United States to be watched closely. It has retreated in European trade.
The dollar also regained highs against the euro and the yen in Asian trade, although the euro recouped losses in European trade.
While the dollar weakened sharply in 2020, it has strengthened since the start of this year, confusing some. Speculators are still short on dollars and the consensus expects the dollar to weaken this year.
BoFA Global Research said there is a risk of the dollar strengthening to the upside this year, given the tougher outlook for risky assets.
“Recent market volatility following the GameStop saga has heightened fears that asset prices have deviated from fundamentals. Either way, starting the year with asset prices at record highs doesn’t leave much room for the upside, ”BoFA Global Research strategists said in a note.
“With risk sentiment being the main driver of the forex market last year, a more difficult outlook for risk assets this year also suggests a less clear picture of currencies and upside risks in USD.”
The dollar index touched 91.60 for the first time since December 1, before declining to 91.438 at 11:58 a.m. GMT.
The gauge has risen daily this week and is on track for a weekly advance of 1.1%, the largest since November 1, after rising 0.3% the week before.
The dollar was supported by higher yields on longer-term U.S. Treasuries, as traders positioned themselves for massive budget spending.
Democrats in the US Senate were holding a marathon voting session aimed at overriding Republican opposition to President Joe Biden’s $ 1.9 trillion COVID-19 relief proposal.
ING strategists said that an increasingly weak correlation of the dollar with the stock markets was noticeable, although it was difficult to explain. They noted that while US Treasury yields rallied last week, they were offset by an equivalent rise in German bunds.
“And certainly, the deployment of vaccination in the United States seems much more impressive than in Europe, even if the gains since the beginning of the year in the United States S&P 500 (+ 3.08%) only slightly exceed those of the Eurostoxx 50 (+ 2.52%), “they said.
“The dollar’s heavy and short positioning probably plays a big role here and would appear vulnerable again if some of today’s non-farm payroll data were to be welcomed.
Analysts and investors are wondering if the strength of the dollar this year is a temporary adjustment in position after a 7% decline in the dollar index in 2020, or a more lasting abandonment of dollar pessimism.
Lots of dollar shorts need to potentially be hedged, especially against the yen, where hedge funds had racked up their biggest bearish bets since 2016.
The dollar was 0.1% higher at 105.62 yen on Friday, previously hitting 105.70 for the first time since October 20.
The euro was 0.2% higher at $ 1.1980 after falling to $ 1.1952, a level not seen since December 1.
Reporting by Ritvik Carvalho; additional reporting by Kevin Buckland in Tokyo; edited by Larry King
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