Rally’s Momentum Slows Amid Waning Optimism
The dollar’s robust rally, fueled by post-election optimism, shows signs of slowing as market indicators suggest the currency may have reached a plateau. Bloomberg’s dollar index dropped on Tuesday for the third consecutive day, retreating from a two-year high achieved last week. Technical metrics, including slow stochastics, indicate the dollar has entered the overbought territory, potentially capping short-term gains.
Investor sentiment is also shifting. Antony Foster, head of Group-of-10 spot trading at Nomura International Plc in London, noted that the dollar’s bullish trajectory is now encountering “choppy waters.” A major driver behind the dollar rally’s has been President-elect Donald Trump’s proposed policies, which include raising tariffs and potentially fueling inflation. While these policies have driven the Bloomberg Dollar Spot Index up 5.3% this year, momentum is waning as traders reassess their positions.
JPMorgan’s FX Risk Appetite Index flagged a short dollar signal last week, hinting at an increased likelihood of a pullback. According to JPMorgan’s Niraj Athavle, global flows show a recent net selling of the dollar, reflecting more cautious sentiment among leveraged funds and asset managers.
Mixed Views on Global Currency Fundamentals
The outlook for other major currencies adds complexity to the dollar’s trajectory. The euro has recovered slightly after touching its $1.05 support level, with additional technical backing at its 2023 low of $1.0448. Opinions on the euro remain divided, with some investors viewing the dip as a buying opportunity, while others predict a potential drop to parity or below.
During a recent meeting, the dollar also struggled to break past 155 yen, even as Bank of Japan Governor Kazuo Ueda refrained from signaling a definitive shift in interest rate policy. Antony Foster observed that flows in the yen market have been “two-way,” reflecting a lack of consensus among investors about the currency’s near-term direction.
Globally, traders appear to be reducing their dollar bets. Asset managers have shown slight buying interest in the dollar against the euro and sterling, which was offset by macro funds selling the greenback. The nuanced positions highlight a shift away from the one-sided bullish sentiment that characterized earlier trading dynamics, signaling a potential end to the dollar rally.
Future of Dollar Strength Divides Experts
Despite the emerging turbulence, some analysts maintain that the dollar has room to grow. Hedge funds and other speculators hold $17.7 billion in contracts that could benefit from further dollar gains, according to Commodity Futures Trading Commission data. Goldman Sachs recently revised its stance, discarding its earlier expectations of dollar depreciation. The firm now anticipates a 3% rise in the trade-weighted dollar index over the next year, driven by the potential for Trump’s policies to sustain inflation and slow Federal Reserve rate cuts. This has led to a continued dollar rally.
Other firms, such as Morgan Stanley, foresee a more range-bound dollar in 2025 but expect gains through the remainder of this year. Helen Given, a foreign exchange trader at Monex, pointed to the new administration’s domestic and trade policies as sources of upward pressure on the dollar, though she cautioned that risks remain. “There is room for some downside if these policies either aren’t enacted or don’t work, but the risks for the dollar remain tilted to the upside,” she said.
As two-way trading returns and investor views become increasingly divergent, the dollar’s path forward is likely to remain volatile, with sentiment swayed by evolving economic and political developments.
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