The greenback has gained almost 0.5% since the beginning of July, very close to the annual highs recorded in March in the region of 93.50 points.

It should be noted that over the past few months, there have been plenty of attempts to strengthen the US currency, but each time the bears for the USD managed to reverse its growth. Will the dollar bulls finally gain the upper hand?

The weak closing of the stock markets last week turned into an outright sell-off at the beginning of a new one, analysts at Saxo Bank note. According to them, the classic scenario of risk relief played out on the eve.

Following the results of yesterday's trading, the US stock market fell sharply. At the same time, the Dow Jones index recorded the largest drop since October. The rest of the world's sites were also mostly in the red.

The main beneficiary of the increased volatility in the markets was the dollar, which has updated the high against the euro since April 5.

However, after flexing its muscles and rising above 93.00 points, the greenback soon rolled back and by Monday evening, it did not look so aggressive.

At the same time, the EUR/USD pair was able to recover somewhat and ended yesterday just below 1.1800.

The pair was able to avoid serious losses against the background of a stock sell-off, largely due to the fact that low interest rates in the EU made the euro a priority funding currency.

Global stock markets are trying to rebound on Tuesday, forcing the safe dollar to take a pause in growth. Futures on the main US stock indexes are showing positive dynamics today, after they fell by 1-2% a day earlier.

The emergence of the more contagious COVID-19 "Delta" strain has jeopardized the sustainability of the global economic recovery. However, some traders believe that this strain will delay rather than disrupt a significant recovery in economic activity in the world, and consider the recent sell-off in the stock market as an opportunity to invest for the long term.

The careless market was not ready for the rise of volatility, say the strategists of Saxo Bank and warn that there is a risk of further deterioration of the situation.

"The probability of implementing such a scenario strengthens the positioning in the US futures market, where long positions on EUR/USD are still open, although the net volume of speculative longs as of last Tuesday was the smallest since March last year," they said.

Unprecedented measures of monetary support from the Federal Reserve, namely near-zero interest rates and the quantitative easing program launched for the first time since 2009, became the fuel for the upward dynamics of US stock indices.

It is clear that the money poured into the market has not gone away and any drawdown can be redeemed in the hope of new growth. However, the question is increasingly being asked as to who will eventually pay for this growth. In addition, there are fears that if the Fed raises interest rates to combat inflation, it will not only strengthen the dollar, but also raise the appeal of treasuries. The Fed continues to actively buy the latter.

Excess liquidity in the US is already more than $1 trillion. The US central bank is most likely aware that this creates risks for the entire system and for inflation.

Perhaps the Fed itself will start selling off assets. Thus, it will absorb all the excess liquidity, and the money on the balance sheet will be sent to the state budget, which just needs more than $1 trillion. This will have a negative impact on the stock market, since such a step will lead to a strong increase in the yield of treasuries. However, this is still only an assumption.

There is another option: with increased demand in the debt market, the US Treasury will be able to more profitably raise funds for the state budget, which is probably the Fed's goal. After it is completed, the central bank will gradually begin to wind down this program and absorb liquidity, raising the reverse repo rate. In this case, the fall in stock indices will be softer.

However, whatever one may say, the fiscal year ends in September in the United States, and the country's authorities must solve the problem with the budget and excess liquidity. So at the beginning of autumn, very high volatility can be expected in the markets.

Fed Chairman Jerome Powell argues that the central bank considers the surge in inflation in the United States to be temporary and will not risk and undermine the economic recovery due to premature tightening of monetary policy.

However, hawkish-minded Fed officials are proposing to cut support for the economy through asset purchases in September and raise interest rates next year.

"The Fed very quickly moved from simple thoughts about inflation to raising rates. The restructuring of the market will take several months, which will be very difficult. Until the first increase occurs, the dollar will rise much higher," Societe Generale strategists believe.

Although the euro serves as a funding currency and is generally holding up well against the greenback, investors still turn to the latter in difficult times. Therefore, the euro should remain far behind.

Even if the Fed refrains from forcefully curtailing the bond-buying program, Europe will still be one step ahead – here the liquidity injection program may even be extended.

On Thursday, the ECB will hold a regular meeting on monetary policy – the first since the announcement of the results of the strategic policy review, following which the central bank softened the mood towards inflation.

Analysts at Brown Brother Harriman believe that the central bank can demonstrate a very pessimistic attitude.

According to analysts, the increase in the number of infected COVID-19 in the EU may encourage the dovish in the ECB Governing Council.

"The ECB is expected to solidify its dovish policy setting at its meeting this week, paving the way for further easing for the euro in the coming months. At the same time, the dollar is likely to maintain support from the demand for defensive assets, which will push the EUR/USD pair to 1.1700 by the end of the year," Rabobank said.

The main currency pair failed to settle above 1.1800 on Tuesday and visited the level of 1.1758 for the first time since early April.

The EUR/USD pair remains bearish as the bulls coming in dips do not show willingness to push it above 1.1800, analysts from Societe Generale said.

"The next support is at 1.1745. In the meantime, upside attempts should contain the 1.1900 level," they said.