Dollar drops in choppy trading, investors rebalance for month-end

U.S. hundred dollar bills
Levent Songur | E+ | Getty Images

The safe-haven U.S. dollar fell on Thursday in choppy trading and riskier currencies including the Australian dollar reversed earlier losses as stocks rebounded, and as investors repositioned portfolios for month-end.

The dollar was boosted by safety buying earlier this week on concerns that U.S. fiscal stimulus will not be as large as originally hoped, and due to the continuing spread of COVID-19 as countries struggle to roll out vaccines.

But it gave up earlier gains on Thursday as stocks rose, boosted by a reversal of declines in mega-cap technology stocks.

That came even after data on Thursday showed that the U.S. economy contracted at its sharpest pace since World War Two in 2020 as COVID-19 ravaged services businesses like restaurants and airlines, throwing millions of Americans out of work and into poverty.

"There's such a tug of war right now between the longer-term momentum…and the shorter-term term phenomenon of maybe a dollar short squeeze," said Erik Nelson, a macro strategist at Wells Fargo in New York.

The dollar has rebounded from three-year lows reached earlier this month, with the recent decline viewed as having run too far too fast.

The dollar index against a basket of currencies is up more than 0.50% this month after falling more than 6% last year. It was last down 0.13% on the day at 90.53.

This week investors also have been rebalancing portfolios for month-end, which has boosted demand for the U.S. currency.

"Of late its really been a position rebalance story," said Bipan Rai, North American head of FX strategy at CIBC Capital in Toronto. "The market's still pretty short dollars, I would say that the last little while has really been driven by that theme."

The Australian dollar gained 0.08% to $0.7669, after earlier falling to $0.7590, the lowest since Dec. 29.