Dollar Up On Stronger Data, Stimulus Concerns & Risk Aversion

The US dollar rallied against all of the major currencies on Friday as stocks descended from their highs. Three days into the new administration and investors are starting to worry about President Biden’s ability to pass a $1.9 trillion stimulus package and administer 100 million vaccines in his first 100 days. The problem is that vaccine rollouts have been slow with many states have been hit by supply constraints. Republican leaders are also pushing back on the stimulus package with Mitt Romney saying “he’s not looking for a new program in the immediate future” and GOP Senator Roy Blunt calling the plan a non-starter. For the risk rally to continue, successful vaccine rollout and an aggressive stimulus package are essential.

U.S. dollar banknote with map

Image Source: Unsplash

The Federal Reserve meets next week and they will be watching all of this very closely. Unfortunately, we don’t expect any meaningful progress on both fronts by then which means the central bank will opt for a steadily dovish policy. Despite record-breaking virus cases in December, US economic reports haven’t been terrible. According to Markit Economics, manufacturing and service sector activity accelerated in the month of January. Existing home sales rebounded which is consistent with the strength we saw earlier this week in housing starts and building permits. The Philadelphia Fed survey nearly tripled at the start of the year and with stocks hovering near record highs, there’s little reason for immediate concerns. In fact like the ECB and the Bank of Canada, the Federal Reserve will talk about near-term risks but emphasize the possibility of a strong recovery. This could provide some near-term support for the dollar but the prospect of more stimulus and a larger fiscal deficit will limit gains.

It's official – the widespread lockdowns in Europe failed to curtail the region’s recovery. According to the latest reports, the German economy expanded last month and while the pace was slower than the prior month, it was stronger than anticipated. Manufacturing activity continued to grow while services slowed modestly. For the Eurozone as a whole, manufacturing activity also led the gains. All of this suggests that the euro, which was the day’s best performing currency could start Monday on a strong note. There’s still risk for a pullback though ahead of fourth-quarter GDP data on Friday.

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