Dollar index: Risks remain skewed to the downside despite minor bounce from 3-month low
- The US dollar charts a minor recovery from multi-year lows.
- The US Democrats flip Senate, revive reflation trades.
- The US inflation expectations jump to the highest since November 2018.
The dollar index, which tracks the greenback's value against majors, has recovered to 89.47 from the 33-month low of 89.21 reached Wednesday. However, the path of least resistance for the US dollar appears to be on the downside, with the US bond markets signaling reflation.
The US 10-year yield has risen above 1% for the first time since March 2020 alongside the US 10-year breakeven rate's rise to a 26-month high of 2.06%. The bond markets look to be pricing reflation, expansion in the level of output of an economy by government stimulus, using either fiscal or monetary policy.
The Federal Reserve is already running an ultra-easy monetary policy. Meanwhile, with the Democrats now in control of the US Senate, the markets expect a bigger fiscal stimulus.
According to Bloomberg, reflation trades are getting a new lease on life with Democrats taking Senate. As such, the anti-risk greenback is expected to remain under pressure.
That said, a minor bounce could be seen if the US-China tensions weigh over the equity markets.
According to the Wall Steet Journal (WSJ), US officials are reportedly considering prohibiting Americans from investing in Alibaba and Tencent Holdings. The move comes following the US President Donald Trump's decision to ban transactions with 8 Chinese software applications and NYSE's decision to delist Chinese telecommunications companies. However, at press time, the futures tied to the S&P 500 are up 0.44%.
Technical levels
Author
Omkar Godbole
FXStreet Contributor
Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.
