8 hrs ago
Dollar Rally Nears Yearly High as Overbought Risks Grow
The US dollar has been getting stronger for three weeks.
Investors have been buying it because US interest rates are expected to be higher and the dollar is seen as a safer place during uncertain times.
Concerns about France’s finances and Europe’s bond markets have weighed on the euro.
Higher energy prices linked to the war in Iran have also hurt the euro and helped the dollar.
Many traders expect the US central bank to raise rates, but BlackRock thinks markets may be expecting too many increases.
Some measures suggest the dollar has risen so quickly that it could be due for a pause or drop.
Morgan Stanley says it would prefer to buy the dollar after a dip rather than at current levels.
Upcoming US economic reports may help show whether the rally continues.
The Bloomberg Dollar Spot Index rose as much as 0.4%, extending a three-week advance and approaching its strongest levels this year.
Demand for the dollar has been supported by relatively high US yields, a resilient economy and safe-haven appeal amid geopolitical uncertainty.
The euro weakened amid French fiscal concerns, worries about contagion in Europe’s bond markets and elevated energy prices linked to the war in Iran.
Markets are pricing in more than 80 basis points of US rate increases through next September, including one hike this year.
The dollar index’s relative-strength reading has stayed above 70, while BlackRock and Morgan Stanley cautioned that the rally may be difficult to sustain.
- Who
- The US dollar, euro, investors and currency-market analysts.
- What
- The dollar extended its rally toward its strongest levels of the year, while analysts warned it may be overstretched.
- Where
- Foreign-exchange markets, with concerns also focused on France and European government bond markets.
- When
- During a three-week run of gains, with the index still above an overbought threshold on Monday afternoon.
- Why
- The dollar has drawn support from US yields, economic resilience and safe-haven demand; the euro has faced fiscal and energy-related pressures.
Reasons the dollar could remain strong
Reasons the rally may falter
US fundamentals and haven demand
Reasons the dollar could remain strong
Manulife’s Nathan Thooft cited relatively higher US yields, a resilient economy and safe-haven demand as support for the dollar.
Reasons the rally may falter
BlackRock said the dollar’s resilience was supported by fundamentals but questioned whether the Federal Reserve would raise rates as much as markets expect.
Outlook for further gains
Reasons the dollar could remain strong
Market pricing for US rate increases and uncertainty in Europe have helped the dollar advance.
Reasons the rally may falter
BlackRock said there was limited scope for a sustained dollar bull run; Morgan Stanley warned that a sudden increase in dollar-negative risk premium could force long positions to close and preferred buying on a dip.
Rally momentum
Reasons the dollar could remain strong
The dollar had risen for three consecutive weeks and was nearing its strongest levels of the year.
Reasons the rally may falter
The index’s relative-strength measure remained above 70, suggesting the move was stretched and could face a reversal.
Key facts
- Dollar index move
- Bloomberg Dollar Spot Index rose as much as 0.4%.
- Recent performance
- The index extended a three-week run of gains.
- Momentum measure
- The index’s relative-strength reading rose above 70 a week earlier and remained there Monday afternoon.
- Market rate expectations
- Traders priced in more than 80 basis points of US rate increases through next September, including one hike this year.
- BlackRock view
- BlackRock analysts said the dollar was resilient but saw limited room for a sustained rally if markets were pricing more Fed tightening than would occur.
- Morgan Stanley view
- Morgan Stanley strategists said they would look to buy the dollar on a dip rather than at current levels.
- Euro pressures
- The euro was weighed down by French fiscal risks, concern about European bond-market contagion and elevated energy prices linked to the war in Iran.
Quotes
BlackRock Investment Institute analysts
Analysts including Jean Boivin, Wei Li and Roelof Salomons.
“With markets pricing more Fed tightening than we think will materialize, there is limited scope for a sustained dollar bull run.”
livemint.com
“We are concerned that a sudden increase in dollar-negative risk premium could lead to a ‘stop out’ of dollar long trades.”
livemint.com
Nathan Thooft
Senior portfolio manager at Manulife Investment Management.
“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.”
livemint.com
Sources
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