LONDON: The dollar index dropped on Thursday, risk currencies rose to three-year highs and the euro continued its surge against the Swiss franc, as currency markets were boosted by dovish signals from the US Federal Reserve.
Easy financial conditions, the promise of fiscal stimulus and accelerating COVID-19 vaccine rollouts have driven money into what is known as the reflation trade, referring to bets on an upswing in economic activity and prices.
Fed Chair Jerome Powell reiterated on Wednesday that the central bank would not tighten its policy until the economy improves.
As world shares rose, the dollar weakened, and was down 0.3% against a basket of currencies at 89.754 at 1222 GMT.
The Australian dollar rose against the US dollar, crossing $0.8 for the first time in three years.
The Canadian dollar also hit new 3-year highs against the US dollar, up 0.3% at 1.2481 at 1224 GMT.
“It’s a bit of a double push for Australian dollar and Canadian dollar, because on the one hand the reflation trade can benefit commodity currencies because commodity prices go up_ but they also tend to benefit because of dollar weakness when stock markets come back in as well,” said Neil Jones, head of FX sales for financial institutions at Mizuho.
Oil prices have rallied around 30% since the start of the year, taking the commodity-linked Norwegian crown to its strongest since 2018 against the dollar.
“The improving global growth outlook continues to be supported by loose monetary and fiscal policies,” wrote Lee Hardman, currency analyst at MUFG in a note to clients.
“For now we continue to see the current trading environment as remaining supportive for commodity-related currency strength, and recommended a long AUD/USD trade.”
The euro touched its highest in over a month versus the dollar. At 1226 GMT, it was up 0.5% on the day at $1.2233.
Euro-Swiss franc has surged this week, as investors quit the safe-haven franc. The euro is in its eight consecutive session of gains versus the franc and has had its strongest week in percentage change terms since June 2020.
At 1227 GMT, the euro was up around 0.5% versus the franc, at 1.1085.
“This is a big vote of confidence in the global recovery, and we see EUR/CHF on track to meet our year-end forecast at 1.15,” ING global head of markets Chris Turner wrote in a note to clients on Wednesday.
Reuters polls found that market participants expect the bull run in global stocks, fuelled by cheap liquidity and reflation hopes, to continue for at least another six months.
“The overall longer trend is still for higher - for dollar weakness and higher asset prices overall,” Mizuho’s Jones said. Bitcoin was steady around the $50,000 mark, having recovered some of its losses from the start of the week.
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