While such a large fiscal relief package does weaken the dollar somewhat, it also increases the risk of earlier policy normalization by the Fed, the strategists said. In all, the measure should support the dollar's strength, they added. Fiscal policy in the European Union, however, is "not as supportive and if anything could be tightened too early," the team said. The global economy is expected to rebound in as widespread vaccination brings an end to the coronavirus pandemic.
EU growth is estimated to reach 2. The US's decoupling from the EU economy should support the dollar as US spare capacity fades and the rates market prices in early Fed normalization, the team said. Read more: Short-seller Carson Block says the day-trading revolution that hit GameStop and other stocks is changing the playing field for investors like him.
Here's how his firm is reinventing itself - and what he's betting against today. The dollar could be the next asset to face a massive short squeeze following the GameStop phenomenon in January, Bank of America said. The market continues to short the dollar despite the currency's recent rally. If the team's projections are right and the US economy outpaces the EU's, selling of the euro-dollar trade will likely cut into long positions and strengthen the dollar, the strategists said.
The risk-on party that's lifted stocks through the year-to-date won't last forever, and a reversal stands to push more investors into cash positions, the team said. Since economic growth was receding as a result of the large deleveraging of financial assets, the government had to take up the slack by increasing spending and propping up the economy.
The purpose of government spending was to create jobs so that the consumer could earn money and increase consumption, thereby fueling the growth needed to support economic growth. The government took this position at the expense of an increasing deficit and national debt. In short, the government essentially printed money and sold government bonds to foreign governments and investors to increase the supply of dollars, resulting in the currency's depreciation.
Outside of paying close attention to market sentiment and technical factors such as government data, it may be helpful for a trader to keep an eye on the Dollar Index chart to provide an overview of how the dollar fares against the other currencies in the index. A trader can develop a big picture sense of the flow of dollars and form an insight on how best to select profitable trading positions by watching the patterns on the chart and as mentioned above, listening to the major fundamental factors that affect supply and demand.
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