US dollar extends recovery on risk aversion, traders eye Biden’s FX policy

The US dollar extends recovery from Jan 6 low (the lowest since Apr 2018) and hit five-week high against the basket of major world currencies on Monday.

Fresh risk aversion across currency markets lifts the greenback, with comments from Janet Yellen, Biden’s pick to take over the US Treasury that the United States does not seek a weaker dollar, adding to greenback’s tailwinds.

Markets remain focused on the new administration’s stance on the dollar as outgoing President Donald Trump has publicly rallied against the dollar’s strength for years and comments suggest that policy is likely to turn.

Biden’s plan for a $1.9 trillion stimulus package also helped the dollar to almost fully reverse December’s fall, as a broad dollar basket gained 1.4% in the opening weeks of 2021.

Analysts expect fiscal stimulus to be one of main dollar’s drivers in the process directly linked to the economic recovery, but remain cautious about the short-term outlook, as history suggests a strong seasonal pattern that points to the potential for further strength in the near-term, however seasonal bias might not provide enough support as rising optimism about stronger economic recovery would boost an appetite for riskier assets.

The dollar index is in steep downtrend since March and current bounce so far looks more like correction which is expected to provide better opportunities to re-enter bearish market.

Technical studies on daily chart have improved but strong bearish momentum persists on larger timeframes (weekly and monthly) and warning that recovery rally may soon run out of steam.

Fresh bulls eye Fibonacci resistance at 91.30 (38.2% retracement of 94.78/89.15 bear-leg), with stronger bullish acceleration to be capped under key barriers at 92.00 zone (50% retracement / falling 20-week moving average) to keep larger bears in play, while firm break above these resistances would generate initial reversal signal and allow for stronger correction.