The dollar lost 12.5% in value against the other major currencies between last spring and early January.
It was a steady move down by the currency as risk appetite returned to markets over this period and safe-haven flows unwound, helped by positive developments on Covid vaccines in the closing months of last year.
The euro was a notable beneficiary of the news on vaccines, climbing above $1.23 in early 2021 from below $1.17 at the start of November.
This is only the second move above $1.20 by the euro since the ECB introduced negative interest rates in 2014. The previous move occurred at the start of 2018, and saw the euro-dollar rate rise to a high of $1.25.
However, it was not sustained as the dollar regained strength, with the euro dropping back below $1.20 within a number of months. The euro continued to move lower subsequently, before bottoming out at $1.07 early last year.
The dollar has managed to regain some ground over the past week. Expectations the incoming Biden administration will deliver its planned major fiscal stimulus package has raised US bond yields, which is supporting the currency.
The sharp rise in coronavirus cases and deaths is also starting to weigh on sentiment in markets, helping to boost the dollar.
The euro has fallen back to $1.21 in recent days, raising the question about whether the move above $1.20 will again fail to be sustained. Near term, it is certainly possible the euro could drop below $1.20 towards the $1.18 support level, especially with the market very short on the US currency presently.
The economic outlook, though, suggests the dollar could come under downward pressure again as the year progresses. Vaccines for Covid-19 are set to become widely available over the course of 2021. This should lay the foundations for a period of sustained, robust growth by the global economy over the next couple of years, with the US economy no longer an outperformer.
Risk appetite in markets should also improve as vaccines are rolled out. This will increase the attractiveness of non-US dollar assets, as well as lessen the appeal of safe-haven currencies like the dollar.
However, even if the dollar starts to come under pressure again, it will be a major challenge for the euro to overcome the $1.25 resistance level. Later in the year, though, the euro could really test the $1.25 level if a robust recovery by the global economy is under way by then.