The dollar's rally may be running out of steam (Daily analysis 9.03.2021)

In the first part of the week, investors find no new stimulus. Therefore, the trends that dominated the previous days continue: the sentiment on the equity markets is unsettled, debt yields maintain an upward trajectory, the dollar is strong, and currencies of Poland, the Czech Republic, and Hungary are in trouble.

There is a significant role played by the fiasco of Jerome Powell, who last Thursday not only failed to suppress the turbulence in the debt market but even added fuel to the fire. The situation may be radically changed by tomorrow's series of inflation data, obviously with the US reading at the forefront, and Thursday's meeting of the European Central Bank. The euro's sell-off accelerated after breaking the barrier of 1.20, which was a kind of floor for quotations for a month. The exchange rate of the main currency pair has reached very important levels (1.1850), where there is a high probability of stopping the decline and the demand for the euro should appear. If this does not happen, it may open space for further strengthening of the dollar by about 2 percent.

The dollar is attractive only for a while

The dollar entered 2021 with a strong downward trend. It was halted by a rise in debt yields, which would not have been possible without the good economic situation in Euroland, which will accelerate under the influence of the fiscal package worth 1.9 trillion USD approved in recent days. The aid program, largely based on social transfers, will also boost inflation, which investors are using as an excuse to contest the Fed's promise that monetary support will not be withdrawn soon. Pessimism towards the dollar has, therefore, not withstood the clash with economic realities. The development of the epidemic situation is also not without significance. A sharp drop in the number of new coronavirus infections and hospitalized patients will allow for more states' imminent unfreezing.

Another key to the strength of individual currencies is the progress of vaccination programs in individual countries. The European one can be described as a disappointment, especially against the British one, but also against the American one. The factors that are currently causing the US currency to rally should, in time, become a thing of the past. In the coming months, the global economy should take off, which should result in investors preferring riskier currencies, especially those of emerging economies. The euro should also benefit from this due to, among other things, capital inflows to the Old Continent's equity market. The dollar is not attractive in the long run: it will remain with a massive increase in debt, a deterioration in the balance of payments situation and extremely low interest attractiveness (zero rates combined with stronger inflation than in other countries).