FOREX-Euro hits two-month low against dollar, hovers above $1.20

* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E

By Ritvik Carvalho
LONDON, Feb 3 (Reuters) - The euro dropped to a two-month
low against the dollar on Wednesday, trading just above $1.20,
as investors looked to a widening disparity between the strength
of the U.S. and European pandemic recoveries.
The view was bolstered by moves in Washington toward
fast-tracking more stimulus spending, in contrast with concerns
about extended European lockdowns and expectations for a decline
in euro zone growth this quarter. The euro was down 0.3% at $1.2013 against the dollar
EUR=EBS by midday in London.
Bond and stock markets cheered news that Italian President
Sergio Mattarella was set to ask former European Central Bank
chief Mario Draghi to form a government of national unity, but
the euro largely shrugged it off.
"Draghi's acceptance of a mandate and indications of a
majority backing him will likely be welcomed by markets and may
give some further support to European assets," ING said in a
note to clients.
"That said, the recent political turmoil in Italy has not
generated any risk premia build-up on EUR/USD or EUR/CHF: thus,
the upside potential from the end of the government crisis may
also be somewhat contained."
The broader dollar index =USD was up 0.15% at 91.238 after
rising to a two-month high of 91.283 in the previous session.
The dollar's advances come despite a rally in equities amid
improving risk sentiment, defying the currency's historical
inverse directional relationship with stocks.
However, many analysts expect the correlation to reassert
itself as the year progresses, and for the dollar to decline as
global growth recovers amid massive fiscal stimulus and
ultra-easy monetary policy.
Elsewhere, the Japanese yen traded down 0.1% at 105.06
against the dollar, JPY=EBS . The dollar has 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.
"It's been a nice run for the yen in terms of strength, but
I think there's maybe some tiring of that move and some
retracement," said Bart Wakabayashi, Tokyo branch manager of
State Street Bank and Trust.
"I think 105.50 is a nice target, but I don't seen any real
reasons right now that that move would be extended further."
Many see the dollar's rebound since early last month as a
correction after its relentless decline last year, although some
think the dollar's new-found strength could reflect a retreat of
the bearish sentiment on the currency.
The dollar index has recovered 1.2% this year after an
almost 7% decline in 2020.
The New Zealand dollar was a standout Wednesday after data
showed the county's jobless rate unexpectedly dropped, which was
seen as ruling out prospects for further central bank rate cuts.
The kiwi NZD=D4 advanced as much as 0.4% to 72.21 U.S.
cents in Asia trading hours, backing away from those levels in
London trading.
The Australian dollar AUD=D4 added 0.1% to 76.14 U.S.
cents, looking to snap a three-day decline.

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