* Dollar hits two-month high against the euro, yen
* The euro temporarily falls below 1.20 USD
* Graphic: World FX Rates https://tmsnrt.rs/2RBWI5E
LONDON, Feb. 6 / PRNewswire / – The dollar rose to two-month highs against the euro and yen after data indicated an improvement in the US economic outlook as risk appetite weakened in global equity markets.
US Treasury bond yields rose after ADP salary data showed employment growth on Wednesday and ISM data showed US service industry activity rose to its highest level in nearly two years in January.
Short dollar positions are elevated, which means that the dollar has room to rise if speculators exit these positions.
« We are not convinced that the current recovery of the US dollar will prove sustainable in the short term, » wrote Lee Hardman, currency analyst at MUFG, in a statement to clients, citing the continued decline in US real yields.
« In the short term, however, there is still a risk that the US recovery will stretch further after a sharp sell-off late last year, » he said.
« The relentless surge in global equity markets lost some of its upward momentum earlier this year, creating a more favorable backdrop for the US dollar in the short term. The slow initial adoption of vaccines in Europe is also making some fear this is the outlook for one could undermine global recovery in 2021 and increase the relative attractiveness of the US dollar, « he added.
At 0817 GMT, the dollar was 91.298 against a basket of currencies, up 0.2% for the day.
Bullish comments from political decision-makers at the US Federal Reserve and renewed hopes for fiscal stimulus in the US are also giving new impetus to the reflation business.
The Democratically-controlled US House of Representatives on Wednesday approved a budget review that would allow them to pass President Joe Biden’s proposed $ 1.9 trillion coronavirus relief plan without Republican support.
The euro briefly fell below USD 1.20 for the first time since December 1st.
« Given the positioning and the slow pace of the EZ vaccination, there remain short-term risks to the EUR / USD downtrend, » ING strategists wrote in a note.
In the UK, the focus is on the Bank of England meeting. While no changes in monetary policy are expected, investors will await comments on the economic recovery and the outcome of the bank’s consultation on negative interest rates.
Businesses in the UK have been hampered by a third national lockdown and are grappling with post-Brexit trade barriers to trade with the European Union after the UK left the bloc’s internal market on Dec. 31.
At 0825 GMT, the pound was lower against the euro and 0.5% against the dollar to $ 1.2580 – a 17-day low.
« For today, Sterling could benefit if the BoE maintains its critical stance on negative rates. However, looking ahead to Brexit, we continue to see downside risks to Sterling, » Commerzbank strategist You-Na Park-Heger wrote in a note.
Elsewhere, the Australian dollar rose 0.2% against the US dollar to 0.76320. The Norwegian krone fell around 0.3%.
The yen was down 10% against the dollar around 0836 GMT to hit 105.180.
Bitcoin continued to climb, hitting a 20-day high. Ethereum hit record highs above $ 1,600.
(Reporting by Elizabeth Howcroft, Editing by Larry King)