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Dollar kicks off 2021 on the backfoot, Gold shines

Dollar kicks off 2021 on the backfoot, Gold shines

The Greenback remains an unloved currency on the first trading day of 2021. Low interest rates and an improving economic outlook following vaccines rollout has led to further short selling in the US Dollar, particularly against the Euro and Chinese Yuan.

China's Renminbi strengthened 1% in early Monday trade, with USD/CNY crossing below 6.50 for the first time since June 2018. That has erased all Chinese currency losses since the US-China trade war kicked off officially in July 2018.  The strength in the Chinese Renminbi came despite slowing manufacturing activity. The Caixin/Markit manufacturing PMI slipped 1.9 points in December to 53.0. However, activity in the world’s second-largest economy remains in expansionary mode, while developed economies continue to impose lockdowns to control the virus spread.

Another supporting source for the currency comes from China's Foreign Exchange Trade System which announced a reduction in the US Dollar's weighting in the currency basket to 18.79% from 21.59%, while increasing the Euro's weighting to 18.15% from 17.40%. The absence of any intervention from the PBOC or state banks would suggest further gains in the upcoming weeks with a possible retest of the 2018 lows of 6.24.

Tuesday's Georgia Senate runoff elections will be critical for the US Dollar as a Democrat win of the two Senate seats could potentially unleash a lot more stimulus which simply suggests more pain for the Greenback.

Gold is also starting the new year with a bang as the precious metal has surged more than 1.2% and hit a high of $1925. Multiple factors are likely to continue lending support for Gold in the upcoming months. The pandemic will not disappear in a matter of weeks with tougher lockdowns also expected as Covid cases continue to rise. Hence central banks will need to keep policy loose by expanding their balance sheets. And given we are starting 2021 with extraordinarily rich valuations in equity markets, Gold is a must-have asset in portfolios. I think it's only a matter of time before we cross back above $2,000 and I won't be surprised if new highs are recorded in the first quarter of 2021.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

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