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The benchmark S&P 500 has rallied 66% off its March 23 low while at the same time the U.S. dollar index has dropped 12%.
The one threat to the risk-on trade is the â€œstrong possibility of a countertrend rally in the DXY dollar index,â€ wrote David Rosenberg, chief economist and strategist atÂ Toronto-based Rosenberg Research, noting a â€œstrong correlationâ€ between the strength in risk assets and the dollarâ€™s weakness.
The greenback has slumped to multiyear lows versus the euro, Japanese yen and Chinese yuan, among other currencies, as investors have prepped for unprecedented monetary and fiscal stimulus deployed to combat the sharpest economic slowdown of the post-World War II era.
Invesco DB US Dollar Index Bullish Fund
A â€œtechnical bounceâ€ in the dollar is possible in the first part of 2021, said Marc Chandler, chief market strategist at the capital markets trading firm Bannockburn Global Forex.
Although the U.S. has struggled to contain COVID-19, Chandler says Europe has been worse and that its rollout of the vaccine is lagging.
He expects Europeâ€™s lockdowns, which could continue through Easter, to weigh on growth â€œwell intoâ€ the first quarter, leading to outperformance in the U.S where fiscal stimulus will â€œjuice the economyâ€ by two to three percentage points.
President Trump on Sunday signed a $900 billion relief package that gives direct payments of up to $600 to most Americans, in addition to extending an additional $300 per week of unemployment benefits and provides Paycheck Protection Program funding. Trump has also called on Congress to increase the size of the direct payment to $2,000.
As the vaccine rolls out, Chandler thinks investors who are overweightÂ the dollar through long-term structural positions will look to reduce their holdings as theÂ focus turnsÂ to the twin deficits â€“ a large trade deficit and a large budget deficit â€“ no matter who wins the Georgia runoffs.
Democrats winning both seats would give the party total control of both the executive and legislative branches of government and â€œfeed into the longer-term dollar bearish story,â€ Chandler said.
Still, he says itâ€™s a little too soon for investors to worry.
â€œIf the yields rise, and I do expect them to rise, I think that is when the consternation hits,â€ Chandler said. â€œWe have rising interest rates and a falling dollar.â€