These declines follow a strong performance in March, when the strong economic recovery in the United States fueled expectations that rising inflation could push the Federal Reserve to reduce its support policies, by raising bond yields and by pulling the dollar higher against most other major currencies.
But in a sign that investors believe the global economic recovery may not be far behind, the dollar index lost 2.7% of its value in one month to trade at $ 90.98 while currencies strongly linked to commodity prices rebounded. The euro climbed 3% to trade at $ 1.20 and the Brazilian real became the best performing currency of the month.
Despite the eurozone plunging into a recession in the first quarter, analysts expect activity in the bloc to gradually increase as vaccination programs accelerate and economies reopen.
“The return of a ‘global’ rather than just ‘American’ reflation trade is the main reason we saw the dollar index lose ground in April,” said Kamakshya Trivedi, strategist at Goldman Sachs.
“In the coming months, we should start to see an unwinding of European Covid restrictions, and we expect further solid gains in oil and copper prices – which should keep the dollar on its feet,” he said. he adds.
U.S. Central Bank Chairman Jay Powell on Wednesday sought to allay fears of a precipitous end to the Fed’s asset purchase program, stressing that accommodative policy was here to stay.
“The Fed has outdone itself. We doubt this will be sustainable, but have to take it for granted for now, ”Bank of America analysts said in a note.
Production data for the first quarter showed that the gap between the pace of growth in the United States and Europe remains large, with the euro area registering a contraction of 0.6% while the United States registered 1, 6% expansion of their gross domestic product.
Silvia Dall’Angelo, senior economist at Federated Hermes, said the US economy was likely to perform better over the next two quarters, but the euro zone “should start to catch up in the third quarter”, making the dollar less attractive once that happens.
Some analysts, however, are not convinced. Win Thin, global head of foreign exchange strategy at Brown Brothers Harriman, said the eurozone was unlikely to match the expansion of the US economy this year, which would lead the Fed to cut back on asset purchases before Europe.
“One of the factors cited for the euro’s recent strength is rising expectations that economic divergences will narrow in the second quarter and beyond. However, we just don’t see it, ”he said. “The ECB will have to maintain its accelerated pace of asset purchases much longer than expected. “