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The new week starts with a resumption of the U.S. Dollar strength that is proving to be an unexpected theme of 2021 that has wrong footed many market participants.

The Greenback has advanced against the Euro, Pound Sterling and all other G10 majors on February 08, and more gains are possible say researchers at Barclays.

"USD is likely to continue extending its gains against G10 currencies while its performance is becoming more mixed vs EM currencies with risk recovery," says Marek Raczko, an analyst with Barclays in London.

The Pound-to-Dollar exchange rate has fallen back to 1.3697 at the time of writing on February 08, confirming the strong rally in place since March 2020 is increasingly at risk of stalling.

GBP/USD spot at publication: 1.3697Bank transfer rates (indicative guide): 1.3318-1.3413FX transfer specialist rates (indicative): 1.3555-1.3600More information on acquiring specialist rates, here2021 was widely expected by the analyst community to be characterised by Dollar weakness, with consensus seeing the currency coming in weaker against most major currencies over coming months.

The general view behind the assumption was that a strong recovery in the rest of the world, driven by vaccinations, would dim U.S. economic exceptionalism and allow for a period of catch-up by other economies and their currencies.

But, U.S. exceptionalism remains intact it would seem, particularly given the sluggish rollout of vaccines in the EU and in other countries in contrast to the steady programme underway in the U.S.

"Key drivers of the recent USD strength versus G10 reflects (1) US growth outperformance, (2) relative monetary policy expectations and (3) positioning adjustments, in our view," says Raczko.

The outperformance of the U.S. economy, and its stock markets, matter a great deal for how the U.S. Dollar behaves, according to the Barclays analyst.

"Continued USD strength amid risk-on moves in contrast to its earlier depreciation indicates that the USD-risk relationship has changed," says Raczko.

Above: Since 2021 the Dollar (blue) has started to rise alongside risk (S&P 500, orange line), overturning the previous dynamic.

The Dollar had in 2020 risen when stock markets were tanking but fallen when markets were in recovery, confirming a safe haven currency.

On this basis, when markets are rising in 2021 the Dollar would be expected to fall.

"Continued USD strength amid such risk-on moves in contrast to its earlier depreciation indicates that the USD-risk relationship has changed. USD weakness late last year that was induced by the reduction in broad risk premia driven by successful development of COVID-19 vaccines was consistent with the safe-haven propensity of the dollar (ie, negative risk-USD correlation)," says Raczko.

The about-turn in USD appreciation despite continued risk-on moves - i.e. the flipping in the Dollar's relationship with risk - since January comes as U.S. equities outperform global equities.

The mechanics of this move are simple enough to understand: investors will channel money into U.S. markets to take advantage of this outperformance, thereby bidding up the value of the Dollar.

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"The USD tends to appreciate on both ends of the risk-on and risk-off spectrum under this regime. This insurance value of the dollar is also providing support to the currency amid radically increased uncertainty in the post-COVID world," says Raczko.

Furthermore, the analyst says the market consensus was heavily betting against the Dollar heading into 2021, allowing for a rally in the currency as this crowded trade was unwound.

Looking ahead, Barclays say the Dollar could lose its shine as "the market focus on near-term outcomes stands in contrast with the more constructive medium-term outlook for the world economy," says Raczko.

Barclays says in coming weeks and months more vaccine supply will become available, and the EU and major EM countries are likely to ramp up their vaccination efforts, eroding US’s perceived advantage on that front.

But, "in the near term, the market will likely continue to focus on relative economic performance, fiscal relief negotiations and progress in vaccination campaigns," says Raczko.