Hopes that politicians in Washington will be able to agree on a new economic stimulus package have whetted investors' appetite for risk and pushed the greenback to its lows in two and a half years.
Optimism amongst market participants was further supported by the announcement that the United States will assist in the production of the vaccine from Pfizer and its German partner BioNTech. Another vaccine, developed by Moderna, is due to be approved by the US regulator this week.
"With all the positive news that has hit the market, from vaccines to incentives, we are seeing dollar weakness across the board," strategists at State Street Bank said.
According to them, after breaking through the previous support level near 91 points, which now acts as resistance, the USD index may fall to 88 points.
Politicians in Washington continue to negotiate more than $900 billion package assistance for the American economy.
On Tuesday, there was information that the congressmen would not leave for the Christmas holidays until they pass some version of the stimulus bill.
"It is not yet clear in what form this bill can be adopted. That said, it is clear that the United States needs additional fiscal stimulus to help it during these winter months," Rabobank said.
Greenback continues to suffer losses in anticipation of the adoption of a new package of fiscal stimulus in the United States and the announcement of the Fed's verdict on monetary policy
Analysts at Standard Chartered believes that "The dollar is likely to weaken further if the Fed softens policy and US lawmakers agree on a new stimulus package."
"The combination of monetary and fiscal stimulus in the US will be negative for the USD as a safe haven asset, as it will boost market participants' optimism," they added.
The USD index has already reached its lowest values since April 2018, approaching the 50% correction level for its movement over the past ten years (around 88 points). In case of a breakout of the last level, a further drop in the greenback may well follow.
The fact that the US dollar will continue to weaken in 2021 is a market consensus. According to Bloomberg experts, by the end of next year, the euro against the US dollar will reach $1.2400.
"We continue to maintain our medium-term bullish outlook for the EUR/USD pair with a target of 1.3000. This forecast is based on changes in hedging and financing schemes, as well as the expectation that the ECB will not try to aggressively restrain the strengthening of the euro yet," said strategists at Citigroup.
"The euro continued to rally against the US dollar after breaking above the top of the $1.1600-1.2000 trading range that had existed since late July. We now expect the EUR/USD pair to trade in a higher range between 1.2000 and 1.2500," MUFG Bank officials said.
However, they noted that the recent rally in the major currency pair mainly reflects the broad weakness of the US dollar rather than the strength of the euro.
"It is assumed that the EU and the UK will conclude a trade deal at the last moment. This will avoid more serious shocks for the eurozone economy early next year. The ECB remains concerned about downside risks to economic growth and inflation in the EU from a stronger euro. At the same time, the regulator is not yet ready to cut interest rates deeper into negative territory in an attempt to weaken the strength of the single currency," MUFG Bank said.
On the eve of the last Fed meeting this year, the main currency pair runs near 2.5-year highs (around 1.2200).
The positive dynamics in EUR/USD are fueled by hopes for the adoption of another package of fiscal stimulus in the US, news that a vaccine from Pfizer and BioNTech may be approved in the EU on December 21, and expectations of an imminent trade deal between London and Brussels.
Following the results of the December meeting, the FRS is likely to leave the interest rate unchanged. However, the main question is whether the regulator will expand the asset purchase program or resort to purchasing longer-term bonds. In any case, players are waiting for action from Jerome Powell and his colleagues.
The fact that the US Congress has not yet been able to agree on another package of assistance to the national economy increases the chances that the Fed can take action. On the other hand, there is a possibility that the Central Bank will prefer to wait until next month.
Although, in general, the EUR/USD pair remains inclined to growth, however, investors' disappointment with the actions of the Federal Reserve may cause its fall.
"The focus is on whether the Fed will extend the term of the bond purchase program. We may see a recovery in the dollar if the regulator does not," said Nomura experts.
According to experts, even if the Fed softens its policy, but expresses optimism about the pace of the US economic recovery, the closure of short positions in USD could sharply strengthen the heavily oversold dollar.