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The US greenback is hovering across the two and a half yr low; Analysts see one other weak spot in 2021

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United States one dollar bills are curled and inspected during production at the Washington Engraving and Printing Office on Nov. 14, 2014.

Gary Cameron | Reuters

The US dollar is currently trading at lows last seen in April 2018 as investors continue to move into riskier assets. Analysts expect this weakness to persist through 2021.

On Friday afternoon in Europe, the DXY US dollar index was trading at around 90.68, down around 6% since the start of the year, despite topping 102 in March as the coronavirus pandemic spread around the world and Brought investors to safety.

However, a string of successful vaccine trials over the past month caused stock markets and other riskier asset classes to collapse, causing the greenback to slide against most G10 currencies. Both the euro and pound sterling hit two-year highs against the dollar on Thursday, while the Swiss franc hit a nearly six-year high.

The combination of vaccination progress, Joe Biden's US election victory, a possible coronavirus bailout from Washington, and the Federal Reserve's commitment to maintain its unprecedented accommodative monetary stance has led to expectations for reflation in 2021. This reflation trade has led analysts to further lower momentum for the dollar.

"We forecast a further decline of 5 to 10% by 2021 as the Fed lets the US economy overheat," ING chief economist Carsten Brzeski said in a research note on Thursday, and the Dutch lender sees the euro on the way to change hands at $ 1.25.

"It is likely about now that we will hear a phrase from a former US Treasury Secretary that the dollar is 'our currency, but it is your problem,'" Brzeski said, suggesting that these words be in Frankfurt will be well received at the meeting of the ECB on December 10th.

"The good news for the ECB, however, is that the trade-weighted euro has barely moved due to the broad depreciation of the dollar, including against Asia," he added.

Brzeski pointed out that the big winners so far have been high "beta" or more volatile currencies, including the Norwegian krone, the New Zealand dollar and the Brazilian real.

Weaker dollar, longer lasting stock pattern

Jonas Goltermann, Senior Markets Economist at Capital Economics, said the broad dollar decline and stock market rally should slow from now on, but their strong inverse relationship should hold up.

"Last month's relative movements are consistent with the correlation between stocks and the dollar observed this year, which is roughly at its highest level since the post-global financial crisis (GFC)," Goltermann said in a statement on Thursday.

"We believe that a similar backdrop of accommodative Fed policy and a recovering global economy will maintain this close link between a weaker dollar and higher stocks."

He noted that the shift in risk appetite since the outbreak of the pandemic has been increasingly tied to dollar performance, with key interest rates and government bond yields relatively stable at low levels across much of the world, a trend similar to that seen in the aftermath GFC.

"That only changed after the 'Taper Tantrum' in 2013 and the risk appetite-dollar relationship then weakened further when the Fed was tightening," said Goltermann.

The "taper tantrum" was a time of reactionary panic on the part of investors when they learned that the Fed was halting its quantitative easing program, and led to a sudden spike in US Treasury bond yields.

"We believe that key interest rates and government bond yields in large parts of the world will remain well anchored for at least a few years and possibly much longer," said Goltermann.

"No matter how quickly vaccines are introduced, we expect risk appetite to remain a major driver of the dollar."

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Katherine Clark