Two-way trading returns, dollar rebound encounters “rough waves”

(Bloomberg) — Some key market indicators are starting to suggest that the Trump-fueled dollar rally may have plateaued as bullish sentiment driven by the U.S. election wanes.

Bloomberg’s currency index fell for a third straight day on Tuesday after rising to a two-year high last week. Momentum indicators suggest further upside may be limited in the near term. Traders said investor flows were less one-sided and were starting to become more cautious about the direction of the currency.

“The dollar’s ​​strength following the U.S. election is definitely heading into a more volatile period,” said Antony Foster, head of G10 spot trading at Nomura International Plc in London.

The world’s reserve currency has been rising since late September, driven in part by President-elect Donald Trump’s plans to raise tariffs and concerns that his agenda will drive up inflation and prevent the Federal Reserve from cutting interest rates. The Bloomberg Dollar Spot Index is up 5.3% this year.

On the technical front, the US dollar’s ​​slow stochastics (momentum indicator) suggests that the currency has reached so-called overbought territory. Niraj Athavle, head of sales and marketing at J.P. Morgan in Singapore, said the bank’s Emerging Markets Foreign Exchange Risk Appetite Index triggered a short signal on the U.S. dollar at the close on November 15.

Investors’ views on the fundamentals of other major currencies are also a factor. The euro has rebounded from support at $1.05 after three months of retreat. Additional technical support for the single currency lies at the 2023 low $1.0448.

“There’s very mixed sentiment here on the euro, with some talking about parity or below parity and others seeing this as a bargain hunting opportunity,” said Nomura’s Foster. “We’re seeing quite a few accounts moving through the euro. Shorts took profits, but by no means all accounts.”

The dollar struggled to break above 155 yen even though Bank of Japan Governor Kazuo Ueda on Tuesday avoided explicitly signaling that he would raise interest rates at the central bank’s December meeting.

“Fund flows in the yen are very much two-way,” Foster said.

Even leveraged funds, which initially ramped up bets that the dollar would rise against currencies such as the euro, offshore yuan and yen after the U.S. election, now appear to have scaled back their bets on continued dollar gains.

“Globally, there has been a net selling of the U.S. dollar overall over the past week,” said J.P. Morgan’s Atafle. “Asset managers were slightly buying the U.S. dollar relative to the euro and the pound, but this was offset by macro funds selling the U.S. dollar against the euro. offset.”

Of course, many on Wall Street are still touting the case for a stronger dollar. Hedge funds, asset managers and other speculators have been preparing for further developments. They hold about $17.7 billion in contracts that are poised to benefit from a stronger dollar, according to the latest data from the Commodity Futures Trading Commission for the week ended Nov. 12.

Goldman Sachs strategists this month abandoned their long-standing view on a weaker dollar as they believe the greenback will remain strong “for longer.” Trump’s protectionist policies could reignite inflation and cause the Federal Reserve to slow its pace of interest rate cuts, which should push the dollar’s trade-weighted index up about 3% next year, they said.

While the Morgan Stanley team believes the dollar will remain range-bound in 2025, they expect it to continue climbing this year.

“The new government’s domestic policies are likely to keep the economy pretty hot, and trade policy will also put some upward pressure on the dollar,” Monex foreign exchange trader Helen Given said. “If these policies are not enacted or don’t work, there is some risk. There is room for the downside, but risks to the dollar remain tilted to the upside.”

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