On Wednesday, the dollar broke its three-week downward trend as investors strengthened positions prior to the releasing of the manufacturing data and minutes of the December U.S. Federal Reserve meeting. Market strategist remain pessimistic of the dollar’s outlook on concerns that potential U.S. rate hikes are already largely priced into the markets.
On the day, the greenback recovered 0.3 percent to 92.10 after losing 2.5 percent over the past three weeks. Regardless of the recent overhaul of the U.S. tax code passed by U.S. policymakers in late-December, market analysts believe the absence of inflation pressures will continue to drive the dollar down.
“The key question for markets is what is the game changer for the dollar in the short term and unless we see a significant pick-up in inflation, the dollar will remain on the back foot,” said Viraj Patel, an FX strategist.
Euro/dollar cross-currency basis swaps for three-month maturities reached its tightest level in almost three years at 22.5 basis points, signifying generally low demand. In the meantime, the euro was nearing the four-month high it reached on Tuesday driven on the optimism over the euro zone’s economy as well as the hope that the European Central Bank will relax its bond-buying stimulus this year. ECB board member, Benoit Coeure, stated over the weekend that he foresees a “reasonable chance” that bond purchases will not be extended after September.
The single currency was trading at $1.2017 after reaching Tuesday’s four-month high of $1.2081, gaining just about 3 percent from the middle of December. The currency came close to the September high of $1.2092, its highest level reached since the beginning of 2015.
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Also, in recent weeks pushing the euro has is higher eurozone bond yields, as the spread between ten-year U.S. and German bond yields sustaining its tightest levels in just about six weeks.