Why The U.S. Dollar Will Not Keep Rising

This current week hasn’t been exactly a ‘hoot’ for the US dollar bulls. The US dollar index has lost 1.15% over the past three days and dipped to 92.25 points—the lowest since Mar. 23. The dollar found itself under pressure due to the decline in US Treasury yields. The 10-year Treasury note slipped to 1.65%, while last week, the yield exceeded 1.7%. The DXY selloff also intensified amid improving market sentiment.

On Tuesday, the IMF revised its 2021 world economic outlook up, expecting the world economy to grow by 6%, which means the overall improvement in the economic projections for the US economy as well. According to IMF experts, the US GDP will increase by 6.4% this year, making the US the only major economy whose growth rate will exceed pre-pandemic levels.

The upbeat assessment followed Friday’s strong labor market data and the services PMI which hit a new all-time high. As for the emerging economies, China also demonstrates a positive picture. It is the only country to return to pre-crisis growth rates last year. Its GDP is expected to grow by another 8.4% this year.Market enthusiasm is backed by US President Joe Biden’s firm intention to accelerate mass vaccinations so that all American adults could get their COVID-19 vaccine by Apr. 19. At the same time, he urged people to be patient and asked them to observe safety measures amid the spread of new strains of the virus. All states except Hawaii said they could meet the deadline.

Market participants keep hoping that government support programs, vaccination of the population, and gradual lifting of quarantine restrictions will contribute to a rapid recovery of global economic activity. In such an environment, traders normally show greater risk appetite, which leads to a decrease in demand for defensive assets such as the Swiss franc, Japanese yen, and the US dollar.Apparently, the world’s major central banks are losing their trust in the greenback. The share of the US dollar in world reserves has hit its lowest since 1995. This is evidenced by the data published by the International Monetary Fund last week. In December 2020, the dollar share in world foreign exchange reserves was 59%, which is 1.5 percentage points less than in the previous quarter.

That being said, the current selloff in the DXY index looks quite logical and could well be the beginning of a new downtrend. If bearish expectations come true, the US Dollar Index will quickly slip back below 90.00.

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