Commodity Calls

Dollar can remain subdued in 2021

Gurumurthy K | Updated on January 03, 2021 Published on January 02, 2021

The strength in the euro leaves the outlook bleak for the greenback

The year 2020 was a bad year for the US Dollar Index. Though the dollar began 2020 on the positive note, it failed to sustain the gains made in the first quarter . The outbreak of the Corona virus across the world took the dollar index to a high of 102.98 in March. But huge stimulus packages announced by the governments and the major central banks, includingthe US Federal Reserve and European Central Bank etc. gave a breather.

It aided in shifting the market focus into the risky assets like the equities and non-dollar currencies and in turn dragged the dollar index lower for the rest of the year. The Dollar Index was down 7 per cent last year.

 

New President

The US-China relationship could be one of the major areas of focus after Joe Biden takes over as the US President this month. Trump had levied huge tariffs on Chinese imports. Will Biden retain these tariffs or relax it? Market will be closely watching how the US under Biden will handle China and that could have a significant impact on dollar.

New Policy

Janet Yellen, the former Federal Reserve chair, is Biden’s choice for leading the Treasury Department. While the market has not reacted much on this news so far, it will be important to see if there is any major policy shift happening if Yellen takes over.

Also, US Federal Reserve Chairman Jerome Powell’s term comes to an end in February 2022.

Whether his term gets extended or will the new US President have a new choice for this post will also be key to watch .

Dollar Outlook

The strong break and a decisive close below 92 in 2020 is negative for the Dollar Index. This could keep it pressured on the downside in 2021 as well as of now. Immediate support is at 89.50. A corrective bounce to 91-92 cannot be ruled out initially in the coming months. But a rise past 92 could be difficult.

As long as the index remains below 92, the outlook will be negative to test 88.30-88 or 87. A break below 87, if seen, can drag the Dollar Index further lower towards 85-83 in 2021. The Dollar Index will have to rise past 92 in order to turn the outlook bullish and also to negate the danger of seeing the deeper fall below 87 mentioned above. But that looks less likely considering the strength in the euro.

Euro remains strong

The euro has surged, breaking above the psychological level of 1.20 last year. It is more likely to remain above 1.20. The region of 1.20-1.18 will be a strong support zone that can limit the downside in the euro. As long as the euro trades above this support zone, the outlook will continue to remain bullish. As such the euro can rise to 1.25-1.26 initially from where a corrective fall is possible. An eventual break above 1.26 will pave way for a further rise to 1.28-1.30 and even higher. The strength in the euro indicates that the Dollar Index is likely to remain below 92 in 2021.

Rupee - room to strengthen

The Indian rupee has recovered well after recording an all-time low of 76.91 in last June. However, the pace of this recovery has been very slow as the Reserve Bank of India was on a dollar buying spree all through last year. On the charts there is room for the rupee to strengthen towards 72.25-72.00 in the first quarter of 2021. Strong support for the currency for now will be in the broad 74.00-74.50 region.

Whether rupee manages to break further above 72 or not will be key in determining the move thereafter. It will also be important to see if the RBI retains its stance of dollar-buying going into 2021 as well. If so, the rupee strengthening beyond 72 might be difficult or it might happen with a delay, like the gradual strengthening happened in 2020. So, for now 72.00-74.50 can be a range to be seen initially in 2021. A breakout of this range can determine the direction of the move later.

(The writer is a Chief Research Analyst at Kshitij Consultancy Services)

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Published on January 02, 2021
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