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Dollar holds ground on hopes of U.S. economic recovery

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The dollar index stood at 90.943 on Thursday in Asia after adding 0.2% overnight

The dollar held its ground on Thursday after its first back-to-back gains in two weeks as upbeat data bolstered expectations that the U.S. economy would recover from the pandemic ahead of other economies.

Bitcoin traded just short of the new record high of $52,640 reached overnight, with its 58% surge prompting some analysts to warn that the rally might be unsustainable.

Government stimulus cheques helped U.S. retail sales bounce back sharply in January, while industrial output and producer prices data were also upbeat.

Investors expect a further boost from U.S. President Joe Biden’s proposed $1.9 trillion fiscal stimulus, with the president meeting top labour leaders on Wednesday to drum up support for the plan.

Meanwhile, minutes from the Federal Reserve’s policy meeting last month reinforced the central bank’s willingness to let the economy run while keeping monetary settings ultra-accommodative.

Biden’s stimulus plans, a steep decline in new infections and rapid vaccine rollout leave the U.S. well positioned to recover sooner than most, Westpac strategists wrote in a client note. That will generate periodic bouts of USD upside.

However, as with many analysts, Westpac’s team expects the dollar to fall this year, amid the Fed’s relentless money printing.

The dollar index was nearly flat at 90.943 on Thursday in Asia after adding 0.2% overnight and 0.4% on Tuesday.

The gauge has advanced nearly 1% this year, bouncing back from a nearly 7% drop in 2020 that extended to a 2-1/2-year low of 89.206 in early January.

Westpac recommends fresh dollar index shorts on rallies toward 91.0.

The euro was also almost flat at $1.20385 after dropping 0.5% overnight, the most in two weeks.

The dollar was nearly flat at 105.845 yen, following a pullback Wednesday after hitting a five-month high of 106.225.

Treasury yields have given the dollar a boost in recent days, with the yield on the benchmark 10-year note rising as much as 1.333% overnight from nearly 1.20% at the end of last week. It retreated in Asia on Thursday to 1.2669%.

Rising U.S. yields have stopped the dollar from declining for now, said Osamu Takashima, the Tokyo-based head of G10 FX strategy at Citigroup Global Markets Japan. In the longer term, we remain bearish on the U.S. dollar: we expect a risk-on environment globally and under such circumstances we think downward pressure on the U.S. dollar could revive.

Takashima expects the dollar to rise as much as 107 yen before dropping to 102 over the next three months.

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