The dollar wave fueled by the US elections is starting to fade

NEW YORK: Some key market data are starting to indicate that the dollar’s Trump-inspired rally may have leveled off as bullishness fueled by the US election wanes.

Bloomberg’s gauge for the currency fell for a third day on Tuesday after rising to a two-year high last week.

Momentum indicators suggest that further upside potential may be limited in the near term.

According to traders, the flow of investors has become less one-sided and views on the currency’s price are becoming more cautious.

“The strong dollar trend following the US election is certainly heading into choppier waters,” said Antony Foster, head of Group-of-10 spot trading in London at Nomura International Plc.

The global reserve currency has been rising since late September, fueled in part by President-elect Donald Trump’s plans to raise rates and concerns that his agenda will fuel inflation and prevent the US Federal Reserve (Fed) from reduce interest rates.

The Bloomberg Dollar Spot Index is up 5.3% this year.

On the technical side, the dollar’s slow stochastics, a momentum indicator, indicate that the currency has reached the so-called overbought area.

JPMorgan Chase & Co’s FX Risk Appetite Index triggered a short dollar signal at the Nov. 15 close, according to Niraj Athavle, head of sales and marketing at the Singapore bank.

Investors’ views on the fundamentals of other major currencies also play a role.

The euro has bounced back to support at $1.05 after a three-month decline.

Additional technical support for the single currency is at a 2023 low of $1.0448.

“Sentiment towards the euro is very mixed here. Some are talking parity and lower, while others believe this is the dip to buy,” said Nomura’s Foster.

“We have seen quite a few accounts make a profit on euro shorts, but not all accounts.”

The dollar is also struggling to break past 155 yen, even as Bank of Japan Governor Kazuo Ueda avoided giving a clear hint on Tuesday that he will raise rates at the central bank’s December meeting.

“For the most part, flows into the yen have been two-way,” Foster said.

Even hedge funds, which initially contributed to bets that the dollar would rise against currencies such as the euro, the offshore yuan and the yen after the US election, appear to be limiting bets on a continued rise in the dollar.

“There has been a net selloff of the dollar globally over the past week,” JPMorgan’s Athavle said.

“Asset managers were small buyers of the dollar against the euro and sterling, but this was offset by macro funds selling the dollar against the euro.”

Hedge funds, asset managers and other speculators have positioned themselves for further progress.

They held about $17.7 billion in contracts that could benefit from a stronger dollar, according to the latest data from the Commodity Futures Trading Commission for the week ended Nov. 12.

Strategists at Goldman Sachs this month abandoned their long-held views on dollar depreciation, citing reasons they see for the US currency to remain stronger for ‘longer’.

The likelihood that Trump’s protectionist policies will reignite inflation and cause the Fed to slow interest rate cuts should lift the dollar’s trade-weighted index by about 3% over the next year, they say.

And while the Morgan Stanley team thinks the dollar will remain more range-bound through 2025, they expect it to continue rising this year.

“The new government’s domestic policies are likely to keep the economy quite warm, and trade policies will also put some upward pressure on the dollar,” said Helen Given, currency trader at Monex.

“There is room for a downside if these policies are not implemented or do not work, but risks to the dollar remain tilted to the upside.” –Bloomberg