Dollar hit new highs Wednesday. Will it continue rallying?

The U.S. dollar traded near to fresh year-to-date highs on Wednesday. Concerns about rising Covid-19 infections along with higher interest rate expectations boosted greenback gains. However, investors are now waiting for the European Central Bank’s meeting due on Thursday for their next clue.

The euro plummeted down to its lowest level since April on Tuesday, trading at $1.1772 in Asia. It still remains near this year’s low at $1.1704. The common currency might find support if the ECB doesn’t meet the market’s expectations for a dovish tweak to rates guidance. But if the bank commits to that course, it could open the way for the currency’s further weakness.

Commonwealth Bank of Australia strategist Kim Mundy noted that the implication is the central bank’s monetary policy will remain ultra-easy for longer. That is a headwind to the euro, though.

Meanwhile, other major currencies also struggled to escape multi-month lows. The British Pound, the Australian, Canadian, and New Zealand dollars all traded under pressure in the Asia session. 

What is the forecast for the U.S. dollar?

According to Westpac analyst Sean Callow in Sydney, the greenback does seem to have quite an undertow of support. On Wednesday, the dollar index climbed up by 0.1% to 93.033. Callow thinks that it may test its March high of 93.439, considering that the currency seemed to find help from risk aversion when traders were nervous and support from rate hike expectations when they were more positive.

The analyst also noted that the general mood on the greenback looks as though it would take a lot to derail the basic narrative of the U.S. currency being in quite a good shape from here to the Jackson Hole conference. He referred to the August symposium in Wyoming where the U.S. Federal Reserve may announce about tapering its bond purchases. Investors probably prefer to keep long dollars for the next few weeks until they have additional hints from the agency.

How did the Australian dollar fare?

On Wednesday, the Australian dollar struggled due to soft retail sales data and the expectation of more weakness in the near term. The country is mainly locked down to hinder coronavirus transmission. The Aussie tumbled down by 0.3% at $0.7310 during the session.

Meanwhile, the New Zealand dollar exchanged hands at $0.6913. The Canadian dollar began to hand back some of the gains it managed to add overnight.

Against the safe-haven Japanese yen, the dollar remained steady. However, the Yen has also been advancing broadly while fears grow about soaring global coronavirus infections. They could present a serious obstacle to various economies on the path to pandemic recovery. The Yen was trading at 109.87 per dollar at last. However, the JPY/EUR pair stood at 129.37.

The seven-day average of daily new Covid-19 infections stands at its highest since May. Furthermore, the corresponding average of reported deaths is on the rise, as well.

What about the British Pound?

The Sterling is also under pressure as cases surge forward while the U.K. abandons most social curbs.

The British Pound exchanged hands at $1.3616 at last, below its 20-day and 200-day moving averages. It is just a fraction above yesterday’s five-month low.

Moreover, the Singapore dollar remained near Tuesday’s eight-month low after the reimposition of some restrictions.

On Wednesday, the data calendar is fairly light. However, the ECB meeting, which is due on Thursday, looms largest on the horizon. Investors expect a dovish tone from the bank after President Christine Lagarde foreshadowed a guidance tweak in his interview last week.

The European Central Bank announced a new strategy allowing it to tolerate inflation above its 2% target. According to Lagarde, the bank would revisit policy guidance to demonstrate its commitment to the new goal.

Analysts at ING noted that no change in the ECB bias is unlikely to be enough to send the common currency higher. Despite that, any ECB shift towards the dovish interpretation of the strategic review will probably underscore the recent downward EUR/USD trend.

How will the Canadian dollar trade over the next 24 hours?

U.S. dollar soared against the Canadian currency, trading above 1.2700 in European trading on Wednesday. The currency pair is currently tracking the rebound in the greenback across the board.

The safe-haven demand for the U.S. dollar has returned amid souring risk sentiment. Furthermore, ongoing US-China tensions add to the cautious mood on the market, collaborating with the greenback’s renewed uptick.

On the other hand, WTI prices are tumbling down and dragging the resource-linked CAD lower. The U.S. oil plunged back below $67 amid a traders’ reduced appetite for risk assets, as well as an unexpected build in the U.S. crude supplies.

The analysts think that the USD/CAD pair will continue trading according to the U.S. dollar dynamics and oil-price action. However, the Senate Democrats’ vote on the infrastructure bill will be in focus, as well.