The USD index dropped to its lowest level in the last two and a half years and then rebounded sharply on Monday.
The volatility of Monday's trading was due to the movement of cash flows typical for the end of the month. The impressive growth in stocks and the weakening of the safe greenback forced investors to rebalance their portfolios on the last day of November.
However, at the beginning of the new month, stock indexes returned to growth, which forced the USD to partially abandon its recent gains.
Even concerns about an increase in the number of COVID-19 infections in the world do not provide significant support to the dollar, as there is growing talk in the market that the Fed may take measures to support the US economy in the harsh winter before vaccination can turn the tide with the pandemic.
"There is a general consensus that the Fed will do something at its December meeting, given the lack of real fiscal steps in the past few months," said BNZ strategists.
The next Fed meeting is to be held on December 15-16, and before that - on Tuesday and Wednesday - the head of the US Central Bank, Jerome Powell, will address Congress, and investors will follow his speeches closely to get clues on the next steps of the regulator.
According to the Chairman of the Federal Reserve, the US economy remains in a difficult and uncertain position, despite progress in the development of vaccines against COVID-19.
"The latest vaccine news is very positive for the US economy in the medium term. However, at the moment, uncertainty remains. This also applies to the timing of the emergence of vaccines, their production, and distribution, effectiveness for different groups of the population," said Powell.
"A full economic recovery is unlikely until people are confident that it is safe to re-engage in a wide range of activities," he added.
According to Moncef Slaoui, senior scientific adviser to the US government's Operation Warp Speed program, about 70% of the entire US population needs to be vaccinated for collective immunity to appear.
This week, the greenback hit its lowest level in more than two years in relation to its main competitors, and many investors expect it to weaken further.
This position is based on the assumption that the advent of vaccines will allow the world's leading economies to return to normal operations within the next year. This encourages investors to sell safe greenbacks and invest in risky assets.
However, if in the near future global hopes for progress in the creation of a vaccine and the start of vaccination of the population in advanced economies are not justified, market participants will have an excellent opportunity to buy the dollar, which is now at its lowest levels since spring 2018.
At the same time, no one can say for sure what will happen at the meeting of the Federal Reserve, scheduled for December 15-16.
In early November, FOMC members concluded that immediate adjustments to the pace of implementation and the structure of the asset repurchase program were not required. The main question now is whether they will change their mind against the backdrop of curtailing credit lines and worsening economic conditions.
It is possible that the Fed may revise its signals to the markets and postpone adjusting the volume or structure of the QE program until it gets a clearer economic picture.
In addition, the buildup of quantitative easing at a time when the US stock market is at record highs, and the financial conditions in the country can be called ultra-soft, can be regarded by the regulator as a significant risk to financial stability.
The consequences of the publication of data on US labor markets for November may also be unpredictable. Experts expect a slowdown in US employment growth, however, if the indicator exceeds expectations, the dollar may regain its recently lost ground.
After touching a three-month high around 1.2000, the main currency pair dipped sharply to 1.1925, but then quickly rebounded, rising above 1.1980.
The downward pressure on the common European currency comes from the obstacles that have arisen in the way of launching the EU Economic Recovery Fund due to the objections of Hungary and Poland, which oppose the merger of fiscal policy issues with the rule of law. In addition, investors are still waiting for the final shape of the Brexit deal between the UK and the European Union.
"The chances of continued growth in EUR/USD will decrease if the pair fails to gain a foothold above 1.1980 in the next two days. A breakthrough of strong support near 1.1900 will signal that the pair has formed a short-term top at 1.2003 and will be trading sideways for some time," said UOB strategists.
