Dollar dive fuels debate about whether greenback has topped out

 ·13 Sep 2022

The dollar’s pullback in recent days is prompting speculation about whether the currency’s march higher is coming to an end. There is nonetheless a reluctance to write it off just yet.

After surging by more than 10% this year, the Bloomberg Dollar Spot Index has dropped close to 2% from the record it hit last week even as expectations for where the Federal Reserve will take interest rates have nudged up.

There are signs that positioning is beginning to turn against the currency and longer-term economic fundamentals are potential hindrances, according to Bank of New York Mellon strategist John Velis. Yet even he is cautious, writing that the market still needs a catalyst to unwind.

A key focus for traders is the upcoming US consumer-price inflation report scheduled for release Tuesday. While a weaker-than-anticipated figure could take a little steam out of rate-hike bets, that might not spell doom for the dollar given that its strength — in BNY’s view at least – has had more to do with growth than interest-rate differentials.

“For a real end to the dollar’s steep ascent, we think it would take more unequivocal noises from the Fed that the cycle is close to its peak,” Velis wrote in a report to clients Monday, noting that is unlikely to happen until the US central bank’s November meeting at the earliest.

The Bloomberg dollar gauge fell 0.1%, extending Monday’s 0.4% loss. The yen led gains in early trading on Tuesday, while the euro also extended its advance after hawkish commentary out of the European Central Bank helped the currency jump more than 1.5% on Monday.

The dollar is under assault from a technical perspective, but it’s “not toasted just yet,” according to Macro Risk Advisors’ John Kolovos. Speaking on Bloomberg Television Monday, the technical strategist said that if the ICE Dollar Index breaks under 105 then “the odds are quite high that the dollar is toast.”

That gauge — which measures the dollar against a group of developed market peers and has declined for five straight days – is hovering just above 108. Other technical indicators suggest further weakening. A sequential indicator by Tom DeMark shows the currency reached an inflection point last week and is likely reversing lower.

Elsewhere, options accounts appear to be less-than enthusiastic about the chances of the dollar hitting another peak. A combined measure of one-month risk-reversals — which compares puts and calls – indicates that traders are the least bullish in around a month about the prospects for the Bloomberg dollar index.

Read: What to expect from the rand in the coming months

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