XE Market Analysis: Europe - Jan 07, 2021
The dollar has found a footing after posting fresh losses yesterday, despite risk appetite holding up in Asian markets and into European trading. The DXY dollar index has inched above 89.50 after yesterday posting a 33-month low at 89.21. Markets are digesting the largely unexpected outcome in the two Georgia runnoff elections, which were won by Democrat candidates. Prospects for a Democrat Presidency, House and Senate have greatly increased the prospect for much more fiscal stimulus than there would have been in the scenario of a split House. Markets have been overlooking the protests by Trump supporters on Capitol Hill, which have petered out, and with the president having called on them to step down. Obviously the situation warrants close monitoring, both near term and in the bigger picture, given the existential threat that the GoP is facing from Trumpism. Market commentaries, meanwhile, have been attributing the new lows in the dollar to the anticipation of larger U.S. trade and budget deficits as a consequence of the runoff elections. Investors have also been recognizing the probability for a higher inflation differential between the U.S. and most of the main economies, which should in turn ratchet down the negative U.S.-versus-peers real interest rate differential given the Fed's built-in inflation tolerance in its monetary policy objective. It should be noted that there are also dollar positives, not least being prospects for increased U.S. growth. We retain an overall bearish view of the dollar, which is likely to continue to lose ground in the unfolding reflation trade, though we are some degrees less bearish than we would have been in the scenario of a Biden administration operating with a split House.