The dollar fell on the first trading day of the year, losing ground to major currencies and pushing emerging-market currencies up to record highs.

The euro advanced 1.4 per cent to trade at $1.23, while the drop in the dollar sent the MSCI Emerging Markets Currencies Index to an all-time high. The Turkish lira, Brazilian real, Chilean peso and some European currencies such as the Polish zloty all gained around 1 per cent, and China’s renminbi strengthened beyond Rmb6.5 for the first time since June 2018.

The dollar’s weak start to the year comes after it lost almost 7 per cent of its value against a basket of peers in 2020. Bets against the currency in the futures market have reached their weightiest level in a decade. Analysts say the decline reflects the revival in risky assets since March last year and wilting demand for the haven dollar.

“This is a dollar move, driven by the rally in risk assets,” said Athanasios Vamvakidis, global head of currency strategy at Bank of America.

While the majority of analysts at large banks had gone into 2021 expecting the dollar to weaken, the pace of the declines has proven faster than some anticipated.

Line chart of $ against €  showing that the euro has surged to its highest level since 2018

“We’ve had a $1.25 target [for the euro], but we could overshoot,” said James Lord, a strategist at Morgan Stanley. “The dollar has a bit further to go down thanks to the Fed’s average inflation targeting framework, a widening trade deficit and better global growth.”

The rally in riskier assets comes after US lawmakers agreed a stimulus deal, and after a conclusion to trade talks between the UK and the EU. Positive manufacturing data from Asia also helped support optimism about a global economic recovery.

“We believe global growth and liquidity conditions remain conducive for risk assets and emerging markets,” said Win Thin, a currency strategist at Brown Brothers Harriman.

Mr Thin said the dollar was set to remain weak in the first quarter, but its path for the rest of the year would depend on the ability of the US to control the virus.

Luis Costa, a currency strategist at Citigroup, said emerging markets currencies would continue to benefit from the dollar’s slide for now, noting that the bank had increased its allocation to the South African rand, the Russian rouble and the Turkish lira against the dollar.

“For the moment, we see [the] emerging market currency appreciation trends continuing,” he said.