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Currencies: The US greenback is being crushed – that's why you possibly can thank the Fed

The US dollar fell sharply against the major currencies on Thursday, and bears assured the Federal Reserve that it won't curtail its bond purchases anytime soon as a green light to sell the currency.

"The latest blow to the dollar came from the Fed, which pledged not to touch politics even if the outlook for the US economy improves as expected," said Joe Manimbo, senior analyst at Western Union Business Solutions.

The weakness also reflected rising expectations that Washington lawmakers will finally agree on an economic bailout that is seen as necessary to sustain a weakening recovery, he said.

The ICE US dollar index
DXY,
-0.77%,
The company, which measures the currency against a basket of six major competitors, fell 0.8% to 89.744, trading below 90 for the first time since April 2018. So far this year it's down 6.9%.

Additionally, the index has fallen nearly 13% since March, when it rose to more than three-year highs when the COVID-19 pandemic plunged the US economy into recession and wreaked havoc in financial markets that drove global investors into the safety of the world's reserve currency.

The dollar sell-off on Thursday was wide:

The euro EURUSD, the most heavily weighted component of the DXY, rose 0.6% to USD 1.2270 and reached its highest level against the dollar since April 2018. The common currency has risen by more than 9% over the year to date.

The dollar fell to more than three years lows against the Japanese currency
USDJPY,
-0.35%,
Down 0.4% to 103.07 yen.

The British pound
GBPUSD,
+ 0.71%
rose 0.8% to $ 1.3617, its highest level since April 2018.

Currencies that normally rebound in line with stocks, commodities, and other perceived risky assets did just that with the Australian dollar
AUDUSD,
+ 0.65%
and the New Zealand dollar
NZDUSD,
+ 0.55%
each by 0.6% compared to the US counterpart. The dollar fell 0.1% against the Canadian dollar
USDCAD,
-0.13%.

US stocks rose on Thursday with the S&P 500
SPX,
+ 0.53%
and Nasdaq Composite
COMP,
+ 0.66%
Hitting intraday trading records during the Dow Jones Industrial Average
DJIA,
+ 0.45%
rose 130 points, or 0.5%.

A falling dollar is typically viewed as positive for US and global stocks, as well as the world economy. It is also seen as the potential missing ingredient for a bullish turn in commodities that are priced in dollars.

See: How a weaker dollar could fuel a commodities boom in 2021

The Fed assured investors at its final policy meeting in 2020 on Wednesday that the central bank would maintain its loose monetary stance, including its bond-buying program, until the economy shows "significant progress" in restoring the damage caused by the virus.

Fed chairman Jerome Powell pointed out in his press conference that the central bank would not rush to run its monetary stimulus measures, although the central bank's economic outlook appeared a little more optimistic than previous iterations.

"The FOMC dotted line looked hawkish … Mr. Powell's comments were anything but," wrote Kit Juckes, global macro strategist at Société Générale, referring to the individual rate forecasts made by members of the Federal Open Market Committee Establishing the guidelines were created.

Of course, other central banks are also using extraordinary measures to support their economies. A weaker dollar, while generally seen as positive for the US and the global economy, is a source of dismay for some rivals, including the European Central Bank.

Also read: How the strong euro is hindering the ECB's attempts to boost inflation in the euro area

However, an important part of the story revolves around interest rates – specifically, the difference between the yields on bonds in the US and elsewhere. While Treasuries are still more profitable than, say, Germany's national debt, that gap has narrowed, reducing the incentive to hold US paper and weakening a source of support for the dollar.

The spread between the US
TMUBMUSD02Y,
0.141%
and German two-year returns
TMBMKDE-02Y,
-0.723%
has decreased from 215 basis points, or 2.15 percentage points, to around 90 basis points this year, noted Mark Haefele, chief investment officer of UBS Global Wealth Management.

The dollar weakness "also reflects the improved outlook for more procyclical currencies resulting from recent positive vaccine news and a corresponding decline in demand for safe haven assets," he said in a statement Thursday, referring to the dollar's bias in certain periods of time to find support from turmoil.

"The prospect of further fiscal stimulus in the US, with Congress continuing to debate the details of a $ 900 billion COVID-19 bailout bill, should keep US debt in focus and put pressure on the greenback "said Haefele.

Read: Coronavirus stimulus talks are expected to take place in Washington as the hurdles remain

Add the improving prospects for a European Union-UK trade deal, a compromise last week that paved the way for a $ 2.2 trillion EU recovery fund, and the continued introduction of COVID-19 Vaccines and the Requirements for the Dollar Keep Falling, Juckes wrote.

"The only problem is it's falling too quickly," he said, noting that SocGen's fourth quarter euro forecast put the common currency at $ 1.27, around 4% above current levels. The euro rose by around 3% in the last month alone.

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