FX.co ★ Dollar still has potential to fall, EUR/USD retreat is short-term

In March, the greenback reached its highest levels in more than three years, thanks to the influx of investors' funds into protective assets against the background of the rapid spread of COVID-19. However, since then, the USD has lost more than 13% in weight.

To a large extent, the weakening of the dollar is a consequence of the huge double deficit of the United States (the state budget and the current account). The high rate of growth of the money supply in the United States, which, according to some estimates, is now about 24%. This is significantly higher than the same indicator for other major economies in the world.

However, the rise in supply is not the only reason traders are getting rid of the US dollar. Near-zero US interest rates limit USD yield.

Most FOMC officials still predict that the federal funds rate will remain near zero until at least the end of 2023.

As a result of the December meeting, the American Central Bank kept the interest rate unchanged (at the level of 0-0.25%). The regulator also said that it will continue to support the national economy with massive monetary stimulus until it sees significant progress in terms of employment and inflation.

Against this backdrop, the greenback updated multi-year lows, dropping below the psychologically important support level of 90 points.

The USD exchange rate was also negatively impacted by expectations of the imminent approval of a new stimulus package in the United States, which increased the risk sentiment in the markets and led to record growth in American stock indices.

"The preconditions and conditions have been formed for the further fall of the dollar due to the super soft policy of the FRS, as well as the prospects for the adoption of another package of fiscal stimulus in the United States. The only problem is that the greenback is falling too quickly," said Societe Generale experts.

As if seizing on this idea, the sellers of the dollar decided to take a breather after the USD fell 1.2% over the past week.

Traders took some profit, considering the USD drawdown to the lowest levels since April 2018 to be a significant move.

On Friday, the greenback rose to 89.9 points, just above the two and a half year low reached on Thursday.

Politicians in Washington have yet to agree on a new fiscal stimulus package, dampening recent market optimism.

Meanwhile, Reuters announced the US intent to add a number of Chinese companies to the trade blacklist.

In addition, the situation around the trade deal between the UK and the EU remains uncertain. Both sides said substantial differences remained.

These events have benefited the defensive greenback, which has managed to recover somewhat from the recent sharp sell-off. However, this "safe haven" remains vulnerable.

"Given that the Fed's policy is still leading to negative real rates, and the chances of an increase in fiscal stimulus in the United States, the greenback has a lot of potential to reduce," strategists at ING said.

After reaching the highest levels since March 2018 (around 1.2270), the main currency pair dipped to 1.2230. Overall, however, it remains bullish and any retreat should be considered corrective.

"We remain bearish on the US dollar while maintaining an optimistic outlook for the EUR/USD pair until the end of the year," Citigroup said.

"On Thursday, the main currency pair closed above the horizontal resistance level at 1.2178. We expect at least a rise to 1.2375 by the end of the year and possibly a continuation of the rise to 1.2500," they added.