Traders who took many short dollar positions late last year are now biting their elbows. As capital inflows to the United States increase, the demand for the U.S. dollar may grow. The dollar will be bought on recovery, as it was bought last year in panic due to the pandemic.

For investors, the dollar has long been the main component of a safe strategy. Now it can be useful in the context of economic recovery. Many analysts predict that the U.S. economy will end the current year with more significant results than the past one.

As soon as there are real signs of a recovery in the U.S. labor market and increased spending, market players are likely to rush to take advantage of this progress. With strong growth in the US economy, investors will begin to abandon foreign stocks in favor of American ones. To do this, they will need dollars. It is these capital flows that are expected to contribute to the growth of the greenback

The economic recovery is having an impact on real returns. After the turmoil in Washington last week, nominal yields jumped. Meanwhile, core inflation should remain stable, as opposed to growth embedded in profitability.

This could help to increase the real profitability and attractiveness of the U.S. in comparison with markets that have negative returns. In addition, it encourages players to buy U.S. Treasury and corporate bonds, rather than buying local securities. For the dollar, this is a direct path to the status of the main currency in the framework of the carry trade.

"Japanese investors who sold foreign bonds two weeks in a row for the first time since May, could earn by hedging the yield of 10-year bonds in yen at the level of 64 bp, providing an increase of 60 bp compared to domestic 10-year Japanese government securities," wrote strategists at Societe Generale on Thursday.

However, there is no question of a quick way up for the dollar. Given the rapid influx of stimulus, which Joe Biden officially announced on Thursday, the U.S. currency may first weaken its position. The economic recovery will force investors to abandon the dollar in favor of risky assets, such as EM sector currencies. It's unlikely to last long. Another jump in yields and the potential leadership of US securities will bring investors back to the U.S. In the near future, the ratio to the dollar should be revised. According to analysts, the rebound of the dollar will continue this year.

Recall that, after the dollar went into a prolonged fall last year, traders began to actively open short positions. The USD index is currently trading at its lowest levels since April 2018.

A recent survey of Bank of America clients showed that the short sale of currency became the most popular transaction after long positions in technology stocks. At the same time, the CFTC report reflected the strongest "bearish" positioning for the dollar in 10 years.

At present the dollar looks oversold, moreover, the technical picture indicates that the dollar is about to turn up after a multi-month decline.