Dollar stands tall on better U.S. outlook vs Europe

NEW YORK/LONDON (Reuters) – The dollar rose to two-month highs against the euro on Tuesday as markets saw a widening disparity between the strength of U.S. and European economic recoveries from the coronavirus pandemic.

Moves in Washington toward more stimulus spending and progress with vaccinations in the United States contrasted with European lockdowns and expectations for a steepening decline in euro zone GDP, despite data on Tuesday that showed less of a contraction in the fourth quarter than had been anticipated.

Against the dollar, the euro was trading at $1.2030 at mid-morning in New York, down almost to an early December low, and off 0.24% for the day as well as down 1.53% for the year.

“Growth differentials are taking a toll on the euro and adding to the traction that we’ve seen for the U.S. currency this year,” said Joe Manimbo, senior market analyst at Western Union Business Solutions.

“Europe might be about a year behind the U.S. in terms of a full recovery,” he said.

The dollar index gained 0.27% despite further gains for global stocks.

Initial European Union estimates showed the euro zone economy contracted less than expected in the fourth quarter of 2020, which was marked by pandemic-induced lockdowns. But the economy appears headed for another, probably steeper decline in the first quarter of this year.

Those concerns were amplified after retail sales in Germany, Europe’s biggest economy, plunged by more than forecast in December, according to data on Monday.

“Things are looking even more depressing here,” Commerzbank strategists said in a daily note.

Supporting the dollar on Tuesday were signs that the Democratic-led U.S. House of Representatives was prepared to take the first step forward on President Joe Biden’s $1.9 trillion COVID-19 relief package with a key vote expected to fast-track the measure even in the face of Republican opposition.

The dollar has also benefited from a massive bout of short-covering, especially against the yen, where hedge funds had racked up their biggest short bets against the greenback since October 2016.

Against the yen, the dollar hovered above 105 yen for the first time since mid-November.

Many see the dollar’s rebound since early last month as a correction after a relentless decline – the dollar index lost almost 7% in 2020 – on expectations of a global recovery from the pandemic with massive fiscal spending and continued ultra-easy monetary policy.

However, some like Claire Dissaux, head of strategy at Millennium Global, remain cautious on the dollar, citing the relative appeal of the valuation of European assets compared with U.S. markets.

Elsewhere, the Australian dollar pared gains after the country’s central bank said it would extend its quantitative easing programme to buy an additional $100 billion of bonds, a decision that many market players thought would wait until next month.

The Aussie last stood at $0.7575, down 0.6% for the day.

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