After a rapid rise following the U.S. election, the dollar's rally appears to have entered a "consolidation phase." The Bloomberg Dollar Index fell for a third consecutive day on Tuesday after reaching a two-year high last week, indicating that market optimism is cooling.
Dollar Rally Slows, Technicals Show Overbought Signal
Analysts point out that the dollar's slow stochastic indicator has entered the overbought zone, suggesting limited upside in the short term. JPMorgan's emerging markets forex risk appetite index has also triggered a sell signal for the dollar. Bloomberg data shows that although the dollar has risen 5.3% this year, market momentum is beginning to slow, and some investors are taking profits.
Technical analysis further shows that the euro rebounded after falling to the $1.05 support level, with additional support at $1.0448. Despite the complex overall sentiment for the euro, some investors are bearish to parity or lower, while others see the current level as a buying opportunity.
Global Traders Adjust Dollar Bets
The dollar's performance against other major currencies also shows signs of weakness. For instance, despite the recent lack of interest rate hike signals from the Bank of Japan's governor, the dollar struggles to break 155 yen. Monex forex trader Helen Given pointed out that the new government's policies might provide some upward pressure on the dollar, but if policy execution falters, there is also downside risk.
JPMorgan data shows that last week there was a net selling trend for the dollar globally, with asset management companies reducing their buying of the dollar against the euro and pound. Macro funds' selling of the dollar against the euro offset some of the buying. This indicates a divergence in market confidence regarding further dollar strength.
Post-Election Policy Expectations Impact on Dollar
Expectations surrounding policies from Trump's new administration remain a market focus. Investors generally believe protectionist policies could push inflation higher and constrain the Fed's ability to cut rates. Goldman Sachs strategists have revised their view on the dollar, expecting it to remain strong long term, predicting that the dollar trade-weighted index will rise by about 3% over the next year.
However, the Morgan Stanley team believes that while the dollar may continue to rise this year, it will fluctuate within a range in the long term. Monex's Helen Given also stated that the risks for the dollar are skewed to the upside, but in the short term, the impact of the new government's policy implementation remains to be seen.
Speculators and Hedge Funds Still Bullish on Dollar
Despite some market signals suggesting a slowdown in dollar momentum, hedge funds and asset management companies remain bullish on the dollar in the long term. According to data from the U.S. Commodity Futures Trading Commission, as of the week ending November 12, speculators held about $17.7 billion in long dollar contracts, showing they are still betting on further dollar strength.
Dollar Rally Slows, Market Divide Notable
Overall, optimism following the U.S. election is gradually cooling, and the dollar's rally is encountering resistance. Technical indicators and market signals suggest limited short-term upside, but the future trajectory remains uncertain. The implementation of new government policies, trading dynamics of major global currencies, and investor sentiment toward the dollar will be crucial factors in determining its future direction.
