What drives the demand for the dollar?
The US dollar on a pair with the euro reached a two-and-a-half-month low and demand for it continues to grow. In recent months, however, we have become accustomed to the fact that the dollar is growing mostly in an environment of nervousness in the financial markets, however, stocks are again close to historical highs, and nervousness from speculative investors disappeared very quickly. So what drives the demand for the dollar?
The dollar puts other currents under pressure
U.S. stock markets are accelerating their recovery, government bond yields are growing, and we see market demand for a wider range of U.S. assets. The US dollar has also been responding to the growth in recent days, although no economic data has been released. Bets on the decline of some stocks from international funds still cause some nervousness and support demand for the dollar, which is rising above several-month highs in some currency pairs. The USDJPY currency pair rose above the level of 105 for the first time since November, but growth dynamics are gradually disappearing. On the EURUSD currency pair, we got below the important level of 1.21 to two-month lows and very close to the level of 1.20.
Clouds over the eurozone
Demand for the dollar, however, is probably starting to be supported mainly by the opening of imaginary scissors between the US economy and the eurozone. In the United States, at least the first dose of the vaccine has been given to the same number of people who have been positively infected since the beginning of the pandemic. Compared to Europe which has supply problems, the pace of vaccination in the USA is very fast, which favors the US dollar over the main European currency. The euro area economy contracted 0.7% in the fourth quarter. Ongoing lockdowns mean that contractions will accompany the first quarter of this year, and if the issue of vaccine shortages is not resolved quickly, economic and business activity may return to normal for several more months. Britain is also better off, having already vaccinated 10% of the population, while Germany and France less than 3%.
Chart: EURUSD Daily Chart (Source: PurpleTrading cTrader)
Other economies and Friday's NFP report
However, the stronger US dollar put under pressure not only the euro, the yen, and the British pound, but also the Australian dollar, which is even the worst of the currencies mentioned. The central bank sends a lot of dovish signals and the dollar is failing despite the summer now, the virus is not spreading too fast and the economy can grow at a much faster pace. However, better labor market data is expected in the fourth quarter. The dollar of New Zealand, where the economy should gradually return to pre-pandemic levels, looks similar.
The dollar is waiting this week for very important data from the US labor market NFP. In fact, growth in the labor market has slowed down over the last 2 months, and it almost stagnated in December. The month of January will probably not indicate where the economy will go in the next few weeks, because it is in these moments that the traditional flu season is culminating and the restrictions are not easing off so much. The dollar is thus breaking away from the stock market, the development of which was crucial to its demand, and the dollar is now strengthening, despite the fact that the risks still apply.