Dollar holds gains on better U.S. outlook vs Europe

By David Henry

NEW YORK (Reuters) - The dollar rose to two-month highs against the euro on Tuesday as markets saw the U.S. as likely to rebound sooner than Europe from the coronavirus pandemic.

The view was bolstered by moves in Washington toward more stimulus spending that contrasted with European lockdowns and expectations for a decline in euro zone GDP in the first three months of this year.

Against the dollar, the euro was trading at $1.202 in the afternoon in New York afternoon, down almost to an early December low, and off 0.32% for the day as well as down 1.61% for the year.

"Growth differentials are taking a toll on the euro and adding to the traction that we've seen for the U.S. currency this year," said Joe Manimbo, senior market analyst at Western Union Business Solutions.

"Europe might be about a year behind the U.S. in terms of a full recovery," he said.

The dollar index gained 0.25% as U.S. and European stock indexes rose global stocks rose nearly 2% and oil jumped 2% to the highest levels in a year.

Initial European Union economic readings showed the euro zone contracted less than expected in the fourth quarter of 2020 but suggested that a steeper decline in the first quarter of this year.

Those concerns were amplified after retail sales in Germany, Europe's biggest economy, plunged by more than forecast in December, according to data on Monday.

"Things are looking even more depressing here," Commerzbank strategists said in a daily note.

Supporting the dollar on Tuesday were steps by Democrats in Congress toward fast-track passage of U.S. President Joe Biden's $1.9 trillion COVID-19 relief package even without Republican support.

The dollar has also benefited from a massive bout of short-covering, especially against the yen, where hedge funds had racked up their biggest short bets against the greenback since October 2016.

Against the yen, the dollar hovered above 105 yen after briefly crossing the level on Monday for the first time since mid-November.

Many see the dollar's rebound since early last month as a correction after a relentless decline - the dollar index lost almost 7% in 2020 - on expectations of a global recovery from the pandemic with massive fiscal spending and continued ultra-easy monetary policy.

Still, Manimbo said the dollar's move may be short-lived.

"If the U.S. can start to see better labor market data, that would make for a more convincing rally," he said.

The next monthly U.S. payroll report is due on Friday.

Graphic: World FX rates https://graphics.reuters.com/GLOBAL-CURRENCIES-PERFORMANCE/0100301V041/index.html

Graphic: USD positions https://fingfx.thomsonreuters.com/gfx/mkt/jbyprnwqkpe/USD%20positions.JPG

(Reporting by David Henry in New York and Saikat Chatterjee in London; Editing by Mark Heinrich)