Dollar dive fuels debate about end of spike

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

After surging by more than 10 percent this year, Bloomberg’s dollar gauge has dropped about 2 percent from last week’s high even as bets for how far the Federal Reserve will raise interest rates have nudged up.

A key focus now has been US inflation data which was due yesterday.

While a weak number may see traders trim rate-hike bets, that might not spell doom for the dollar given its haven appeal and a still-hawkish Fed.

“We’re reaching another point of people arguing ‘peak dollar, peak dollar, peak dollar and it’s about to turn’,” Paul Mackel, head of global foreign-exchange research at HSBC Holdings Plc in Hong Kong, said on Bloomberg Television. “Personally I think it’s too early. It’s going to persist for awhile yet.

“The underlying conditions for that change in the dollar’s direction aren’t there.”

The Bloomberg Dollar Spot Index slipped 0,1 percent in Asian trading, adding to Monday’s 0.4 percent decline. The gauge is still more than 16 percent above the low it set in January last year.

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

Inflection point

That gauge — which measures the dollar against six developed-market peers — has declined for five straight days and is hovering just above 108.

A sequential indicator created by technical analyst Tom DeMark shows the US currency reached an inflection point last week and is likely reversing lower.

At the same time, option accounts are becoming less convinced the dollar will rise to 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 outlook for the Bloomberg dollar index.

Writing off dollar strength is fraught with risk as the Fed can still “outpace” other central banks in raising rates if needed, according to Charu Chanana, a senior strategist at Saxo Capital Markets in Singapore.

“We need risks on Europe and China to become more manageable, or a stronger opposition from non-US officials, or the Fed’s acceptance of a higher inflation target to really call it a top in the US dollar,” she wrote in a research note.

What’s your dollar bet ahead of the Fed decision?

This week’s MLIV Pulse survey asks about the best trades ahead of the FOMC meeting. — Bloomberg