Dollar Edges Higher, But Trend Points South

The dollar edged higher in early European trade Wednesday, but the overall trend is one of weakness, particularly against the single currency after the EU stimulus deal improved sentiment towards the euro.

At 2:55 AM ET (0655 GMT),EUR/USD was up 0.1% at 1.1535, having reached $1.1547 earlier in Asian trading, its highest level since January 2019. .

The Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.1% at 95.097, having earlier fallen to a low of 95.007 overnight, a level not seen since early March.

Elsewhere, USD/JPY was up 0.1% at 106.87, AUD/USD was up 0.3% at 0.7149, closing in on the highest since April last year, while GBP/USD was down 0.1% at 1.2716, not far removed from a six-week high.

This follows the European Union leaders agreeing a substantial stimulus plan to help the countries of the region rebuild their economies from the damage caused by the Covid-19 pandemic.

At the same time, there is a perception that U.S. lawmakers are struggling to reach consensus on the next round of stimulus measures to boost American consumers and businesses.

"You could say the dollar is weaker due to a risk-on move," said Shane Oliver, head of investment strategy and chief economist at AMP (OTC:AMLTF) Capital Investors, in a Reuters report.

"Ironically, the dollar's weakness has been exacerbated by concerns that the United States is not doing as much as the Europeans have on stimulus."

The EU summit agreement is pretty significant, analysts at ING noted, in a research note, as the emergence of grants points to solidarity, while common bonds points to integration.

That said, “with the EUR-specific good news now being largely in the price, we expect the next leg of the EUR/USD upside to come from the dollar side,” ING added, “with the U.S. currency's downtrend caused by a combination of loose monetary policy from the Federal Reserve (note the dollar lost its key advantage which has kept it supported in prior years - the meaningful interest rate differential), the twin deficit and the U.S. Presidential election uncertainty.“

The bank expects EUR/USD to reach 1.20 by the end of the year.