Is Time Up For the Dollar’s Rally? Not So Fast, Strategists Say

The dollar is heading for its worst week since the pandemic struck, yet analysts think a long-running stampede for the greenback isn’t over yet.

The Bloomberg Dollar Spot Index has slumped nearly 3% this week, its biggest loss since March 2020. Investors had been trimming bets on the dollar ahead of Thursday’s US inflation data, with a slowdown in prices leading it to get pummeled in the index’s worst one-day performance since 2009.

The latest selling has knocked the dollar gauge 6% below a record peak hit in late September, with the yen the main beneficiary. While the moves suggest the greenback could stay under pressure in coming weeks on bets the Federal Reserve will slow its pace of interest-rate hikes, market participants remain cautious that the trend will continue in the longer run.

“The dollar peak might be past us, but a dollar downtrend may not be there yet,” ING Groep NV analysts wrote in a note, adding that the Dutch bank remains “moderately bullish” on the dollar into year-end.

This year’s strength in the greenback, taking it up more than 20% from mid-2021 to September, rippled across markets, exacerbating the cost of dollar-denominated goods such as oil and complicating policy around the world. Global stocks and bonds rallied Thursday as the dollar slid.

Strategists at MUFG said that a weaker dollar was now “justified,” while adding that the scale of the move clearly reflects to some degree the “pain trade” seen earlier in the week when investors cut back on overly big bets on the dollar. Instead funds have been piling into the yen, up more than 5% this week after hitting a three-decade low less than a month ago.