Dollar stands tall as euro zone outlook darkens

By Saikat Chatterjee

LONDON (Reuters) – The euro wallowed at seven-week lows against the dollar on Tuesday as concern about extended lockdowns in the euro zone weighed on the single currency and optimism about U.S. stimulus boosted the dollar.

Initial European Union estimates showed the euro zone economy contracted less than expected in the fourth quarter of 2020 amid pandemic-induced lockdowns. But it is heading 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.

“The German retail sales for December disappointed massively, presenting a first taste of how the service sector is suffering under the current European lockdowns, which is likely to be reflected in the corresponding PMIs (purchasing managers’ indexes) over the course of the week.”

Against the dollar, the euro was trading at $1.2078, just above an early December low of $1.2056 the day before. It has weakened more than 2% from an early January peak of near $1.2350.

The dollar index eased by 0.1% to 90.87 amid further gains for global stocks but remained not far from its overnight peak of 91.063, its strongest since Dec. 10.

The dollar 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 dollar since October 2016.

Against the yen, the dollar briefly crossed 105 yen for the first time since mid-November and held firm at 104.875 yen.

STIMULUS HOPES

Many see the dollar’s rebound since early last month as a correction after its relentless decline – the dollar index lost almost 7% in 2020 – on expectations of a global recovery from the pandemic, amid 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.

“The short-term outlook is relatively more negative for Europe than the U.S., but the longer term outlook is more constructive,” she said.

The dollar also remained supported on signs that President Joe Biden was poised to push forward with his $1.9 trillion COVID-19 relief plan even if it fails to draw Republican support. Negotiations resume on Tuesday.

Elsewhere, the Australian dollar pared gains after the country’s central bank said it will 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 $0.7634, a touch higher on the day but off the day’s high of $0.7662.

(Graphic: USD positions, https://fingfx.thomsonreuters.com/gfx/mkt/jbyprnwqkpe/USD%20positions.JPG)

(Reporting by Saikat Chatterjee; editing by Susan Fenton, Larry King)