Dollar index begins 2021 on a negative note

• The US dollar remains on the offer on dovish Fed expectations. 
• Investors ignore weak China data, coronavirus concerns. 

The dollar index, which gauges the greenback’s value against majors, trades on the defensive on the first trading day of the new year, having declined by 6.83% in 2020. 

Investors continue to offer the safe-haven greenback on expectations that the Federal Reserve would keep rates low for a prolonged period, shrugging off coronavirus concerns and weaker-than-expected China data. 

As per The Japan Times, Prime Minister Yoshihide Suga is considering a new state of emergency declaration for Tokyo and three neighboring prefectures amid a surge in COVID-19 cases. The declaration could come this week. Meanwhile, the cases continue to rise in the US and across Europe. Further, China data released early Monday showed the pace of expansion in the manufacturing activity slowed slightly in December. So far, however, that has failed to put a bid under the greenback. At press time, DXY is hovering near 89.68, representing a 0.27% decline on the day.

Prominent investment banks such as Morgan Stanley, Goldman Sachs, and JP Morgan expect the greenback to depreciate by at least 5% this year. 

“We remain upbeat on EUR/USD, EM FX and risk assets in general into the start of this year, and we don’t really want to question this narrative until the recovery is strong enough for both fiscal and monetary administrations to consider removing the foot from the QE/stimulus-pedal,” Nordea analysts said in their weekly note. 

Meanwhile, Robin Brooks, Chief Economist at the Institute of International Finance, foresees a 2013-like taper tantrum once major economies begin mass coronavirus vaccinations. In that case, the safe-haven dollar could find bids.

Technical levels