On Monday, the US dollar index reached two-week highs, testing the key resistance level of 91.00
The greenback gained in value across the board, despite relatively weak ISM data on business activity in the US manufacturing sector.
In January, the ISM US manufacturing purchasing managers' index fell to 58.7 from 60.5 in the previous month.
At the same time, the survey's manufacturing employment gauge rose from 51.7 in December to 52.6, its highest level in twenty months. This reflects a rebound in the US manufacturing labor market. Moreover, this suggests that in January the country's nonfarm payrolls returned to an upward path after the first decline in eight months.
Meanwhile, the euro became one of the main losers of Monday's trading.
The euro/dollar pair slipped at its highest rate in two weeks following the data on German retail sales, which had plunged more than expected in December.
However, the quotes failed to break through the important support level of 1.2050. The currency pair closed yesterday's trading at around 1.2055, down by 0.6%.
The euro's downward movement was limited by IHS Markit's suite of economic data. Its final Eurozone Manufacturing Purchasing Managers' Index fell to 54.8 in January from 55.2 in December. Economists expected the indicator to drop to 54.7.
On Tuesday, following a failed attempt to resume growth, the euro/dollar pair hit a new annual low around the level of 1.2030.
The euro remains under pressure due to growing concerns in the EU over slow Covid-19 vaccine rollouts compared to the US.
Besides, the common European currency was weighed down by the EU's statistics on GDP released today. In the fourth quarter 2020, seasonally adjusted GDP decreased by 0.7% compared to the previous quarter and by 5.1% on an annual basis. After a strong recovery in the third quarter, a slowdown in the bloc economy in October-December fuels fears of a eurozone double-dip recession.
In the meantime, the US dollar edged up amid a sell-off in the euro. On Tuesday, the currency reached its highest level since early December last year.
"When people think about selling euros, invariably you get some buying of dollars, because the euro-dollar exchange rate is easily the most liquid in the world," Commonwealth Bank of Australia said.
According to the bank, a buy back into the US currency was long overdue, as net dollar selling approached a 10-year peak.
Most experts see the current dollar rebound as a short-term correction after its steady decline, with the US dollar index losing more than 9% in 2020.
At the same time, some analysts believe that the newfound strength of the US currency may reflect the dollar's bearish sentiment easing.
"We think USD strength still has room to run. That's especially true against more volatile securities," Wells Fargo wrote.
"Some hedge funds may be forced to unwind their dollar short positions after they got burned by recent short squeeze in some U.S. shares," Daiwa Securities noted.
The recent breakout of the 2020-2021 resistance line around 90.80 has mitigated the downside pressure on the US currency somewhat.
If the price breaks through 91.00, the US dollar will be able to extend gains with a view to reaching the target level of 91.90 (near the 100-day moving average).