By Kevin Buckland
TOKYO (Reuters) – The dollar headed for its best weekly gain in three months, lifted by growing confidence that the U.S. economic recovery will outpace global peers.
The dollar index was just shy of the two-month high reached overnight amid signs of resilience in the labour market, with closely watched nonfarm payroll figures due Friday.
“The U.S. economy is exceptionally strong relative to other countries, causing dollar short covering,” said Tohru Sasaki, J.P. Morgan’s head of Japan market research in Tokyo, pointing to employment and manufacturing indicators as well as the pace of vaccinations.
The current bout of dollar strength could continue for “several weeks,” he said, but the picture is murkier thereafter as Europe and Asia catch up with immunizations and the Federal Reserve’s continued ultra-easy monetary policy caps a rise in long-term U.S. yields.
The dollar index was little changed at 91.529 early in the Asian session after climbing every day so far this week, and touching 91.581 on Thursday for the first time since Dec. 1.
The gauge is on track for a 1.1% weekly advance, the most since Nov. 1, building on a 0.3% rise the previous week.
The greenback got support from a rise in longer-term U.S. Treasury yields, which came as traders positioned for a massive fiscal spending package.
Democrats in the U.S. Senate were poised for a marathon “vote-a-rama” session aimed at overriding Republican opposition to President Joe Biden’s $1.9 trillion COVID-19 relief proposal.
Analysts and investors are weighing whether dollar strength this year is a temporary position adjustment after a 7% drop for the dollar index in 2020, or a longer-lasting shift away from dollar pessimism.
There are potentially a lot of dollar shorts to cover, particularly against the yen, where hedge funds had racked up their biggest bearish bets since 2016.
The dollar was little changed at 105.585 yen on Friday after earlier pushing as high as 105.70 for the first time since Oct. 20.
The euro was mostly flat at $1.1966, maintaing its first move below $1.20 since Dec. 1 from overnight.
Westpac strategists see Europe’s vaccine rollout accelerating by the end of this quarter, which, coupled with the Fed’s commitment to ultra-loose monetary policy, will put pressure back on the dollar.
“DXY upside potential is living on borrowed time,” they wrote in a note, referring to the dollar index. “Sell DXY into 92.”
(Reporting by Kevin Buckland. Editing by Gerry Doyle)
