The dollar has risen in price by almost 2% since the beginning of the year, which caught many investors by surprise, as they expected the greenback to fall further.
The confidence of the dollar bears was shaken when the Democrats gained control of both houses of Congress. Traders began to quote an increase in fiscal stimulus in the United States. This was reflected in the sell-off in the US government bond market. As a result, treasury yields returned to more attractive levels, allowing the dollar to strengthen.
On Monday, the USD index rose above 90.9 points for the first time since December 21.
Most analysts still expect the greenback to weaken this year amid the recovery of the global economy after the end of the coronavirus crisis.
Citigroup experts presented one of the most bearish forecasts for the dollar, saying that it could fall in price by 20%.
According to the Commodity Futures Trading Commission (CFTC), speculators increased the volume of net short positions in USD last week by the most since 2011.
"The speculative community is now turned in a bearish direction against the US currency, and there is a good reason for this: the fundamentals continue to point to a weakening of the dollar in the medium term," said strategists at Lombard Odier.
However, if speculative investors start to get out of their positions, the greenback can sharply jump.
"If a broad rally of the dollar will take place, it is likely due to a partial collapse of positions in any strong decline in risk sentiment, which has not happened since the flooding of the market with liquidity in response to the beginning of the pandemic," Saxo Bank said.
"If the COVID-19 vaccines are less effective than we expect, and the global economy stumbles, the US currency, which remains a safe haven asset, will rise in price," analysts at The Goldman Sachs warn.
"The sudden return of risk aversion is not our baseline forecast. Instead, a more serious obstacle to the continuation of the bearish trend in the USD will be the change in the dollar's behavior, caused by good news from the United States. The cyclical strength of the United States and the pent-up economic downturn in the country, along with the discussion about the merits and timing of the Fed's spending cuts, should limit the scope and duration of the trend towards a weakening of the US currency," HSBC experts said.
The greenback attracted sellers near 91 points and retreated to 90.4, having sank more than 0.3% on Tuesday, a day before the inauguration of the newly elected US President Joe Biden, which will undoubtedly be one of the main events of the current week.
Market participants expect that the newly minted head of the White House will immediately deal with the fate of the $1.9 trillion stimulus package, which he announced last week.
The EUR/USD pair rose above the 1.2100 level today, recovering from the lows of the current year near 1.2050, amid a return of interest in risk in the expectation of additional fiscal stimulus in the United States.
"The main currency pair withstood the initial test of the 55-day moving average around 1.2058 and recovered to the 1.2100 area. In the event of a breakthrough of the 55-day moving average, the drawdown will continue in the direction of 1.2014 (September high) and further - to 1.1969," Commerzbank specialists said.
"If the uptrend (1.1969) and the 23.6% Fibonacci retracement level relative to the growth from March 2020 (1.1945) still hold out, in the medium term the pair will continue to strive towards 1.2556 (2018 high) and 1.2624 (where the 200-month moving average passes). The loss of the 1.1945 level will deepen the fall to 1.1602-1.1612, " they added.