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The sharp rebound of the greenback from multi-year lows in tandem with the US stock market has given rise to speculation that the greenback is turning from a defensive asset into a risky one.

Traders ignored the bad news on the dollar and bought it on the good ones, betting on the faster spread of COVID-19 vaccines in the United States compared to other countries, as well as on the accelerated adoption of a package of assistance to the US economy affected by the pandemic.

However, the correlation between the US stock market and the dollar quickly changed its sign from + to -, and the former continued to grow, while the latter turned in the direction of weakening.

The decline in the USD resumed last Friday against the background of increased risk appetite and proved to be stable after the release of disappointing data on the US labor market.

US stock indexes updated record highs at the beginning of this week, and the yield of treasuries retreated from peak levels, which put pressure on the dollar and allowed the EUR/USD pair to once again target the level above 1.2100.

The USD rate fell to the lowest values for the week – around 90.5 points.

Investors are waiting for the approval of a large-scale program to stimulate the US economy.

Some analysts say that huge budget spending in the US, combined with the Federal Reserve’s continued ultra-loose monetary policy, will pull down the greenback in the long run.

“We believe that the effect of the huge stimulus will soon fade, exacerbating the growth of the US current account deficit, which will put pressure on the dollar,” strategists at Commonwealth Bank of Australia said.

According to them, the belated vaccination program against COVID-19 implemented in Europe will limit the growth of the euro in the foreseeable future, but the EU will be able to catch up by the summer, after which the exchange rate of the single currency against the US dollar will rise to $1.2800.

On Monday, the EUR/USD pair bounced off the 100-day moving average, despite a weak report on industrial production in Germany. On Tuesday, the pair reached the highest levels since the beginning of February in the area of 1.2112.

The US Senate will begin the second impeachment trial of Donald Trump, the trial of which can be a positive factor for the euro, as it will distract investors’ attention from the problems of the eurozone, including those related to mass vaccination against coronavirus in the EU. The stalling of the vaccination campaign has already had a negative impact on business sentiment in the region. This month, the Sentix index of investor confidence in the euro zone economy fell into negative territory, reaching -0.2 points against January’s 1.3 points.

In the event of a decline in the yield of US government bonds, we can see the development of the growth of EUR/USD against the background of a weakening dollar.

In addition, the dynamics of the main pair will be determined by such factors as demand for risk, news about the next package of assistance to the US economy, as well as comments from the Fed and ECB leaders, who will speak later this week.

The material has been provided by InstaForex Company – www.instaforex.com

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