What happened
The dollar is pressing up toward its strongest levels of the year as renewed political uncertainty and fiscal strains in Europe send investors toward safer ground. The Bloomberg Dollar Spot Index gained up to 0.4%, stretching a three-week run, with a busy slate of US economic releases ahead that could shape how long the rally lasts. By several momentum gauges the move looks stretched, raising the odds of a reversal.
“Investors are gravitating toward the dollar because the US continues to offer relatively higher yields, a resilient economy and a safe-haven destination amid geopolitical uncertainty.” According to Manulife Investment Management, senior portfolio manager Nathan Thooft made that remark. He described the upswing as “relentless,” while keeping it in the bucket of a tactical advance.
Why traders are piling in
Rates are doing a lot of the talking. The market is betting on tighter policy in the US than in many other developed economies. Pricing now implies more than 80 basis points of additional increases by next September, including one hike this year.
“With markets pricing more Fed tightening than we think will materialize, there is limited scope for a sustained dollar bull run,” wrote Jean Boivin, Wei Li and Roelof Salomons on Monday.
A strong dollar quietly reprices debt, commodities, and earnings worldwide. Market Briefs follows currencies free every weekday.
Europe, energy and market risks
The euro has lagged many of its Group of 10 peers against the dollar. With France’s budget situation under the microscope, traders worry the current selloff in government bonds could spread and revive memories of the region’s debt crisis from 15 years ago. Higher energy prices related to the war in Iran have also pressured the euro and buoyed the dollar.
Momentum remains elevated: Bloomberg’s dollar gauge shows a relative-strength index that moved past 70 one week ago and still registered above that threshold on Monday afternoon, a reading often associated with an overbought rally.
Positioning and what to watch next
After recently turning bullish on the US dollar, Morgan Stanley is cautioning that a sharp reversal could hit quickly. “We are concerned that a sudden increase in dollar-negative risk premium could lead to a ‘stop out’ of dollar long trades,” wrote FX strategists led by David Adams, noting they prefer to purchase on pullbacks instead of chasing prices where they are now.
Bottom line: the near term is being steered by data and rate expectations. With the dollar screening overbought and big houses cautious on chasing it higher, the next batch of numbers could decide whether this run cools off or finds another leg.
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Source: www.briefs.co
