By Yasin Ebrahim
Investing.com -- The dollar has faced hammer blow after hammer blow in its attempts to hold ground against rivals, but the greenback is finally starting to look 'appealing' as U.S. equities pick up steam against their European rivals.
The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, rose by 0.1% to 101.72.
“[W]e think a long USD position is beginning to look appealing again, perhaps even from a tactical perspective,” Danske Bank said, according to Forexlive.
The bank pointed to EUR/USD losing steam and Eurozone equities beginning to underperform U.S. peers as a source of hope for the dollar.
The MSCI's broad index of European shares, ex-UK, is up about 9% so far in January, versus 6% in the U.S.
Much of the outperformance, however, has been based on a “Goldilocks scenario," Amundi says, pointing to expectations that the Eurozone will still churn out economic growth, underpinning earnings while central banks will pause from hikes.
But European stocks aren’t pricing in the need for the ECB to continue with rate hikes as inflation will remain high, casting a less optimistic backdrop for corporate earnings.
"We could expect a consolidation of 15% to 20% from current levels," on European equity indices, Amundi Chief Investment Officer Vincent Mortier told Reuters, adding that while the rally could still persist for months or weeks, “the drop, the normalisation, will happen."
The recent rally in U.S. stocks versus their European peers gives credence to expectations that it may not be all one-way traffic higher for European stocks. Over the past week, there have been signs European equities have underperformed their U.S. peers, rising about 1% versus the S&P 500’s 2.4%.
There are many, however, who would flag any underperformance in European stocks as an aberration and point to rapid investment inflows into Europe.
Investors poured $3.4 billion into European stock funds in the week through Wednesday, Bank of America said in a note, adding that the inflows into European stocks were the largest since February 2022.
Others, however, believe there isn’t any catalyst for a reversal in the dollar’s decline unless the Fed delivers an unlikely hawkish surprise next week.
“Barring a 50bp hike or a conditional commitment to stop tightening, the bar is high to flip the switch on the status quo. USD is stretched and oversold, but the catalyst for a reversal is absent,” TD Securities said.
Begin trading today! Create an account by completing our form
At One Financial Markets we are committed to safeguarding your privacy.
Please see our Privacy Policy for details about what information is collected from you and why it is collected. We do not sell your information or use it other than as described in the Policy.
Please note that it is in our legitimate business interest to send you certain marketing emails from time to time. However, if you would prefer not to receive these you can opt-out by ticking the box below.
Alternatively, you can use the unsubscribe link at the bottom of the Demo account confirmation email or any subsequent emails we send.
By completing the form and downloading the platform you agree with the use of your personal information as detailed in the Policy.