Dollar’s winning streak ‘unlikely to last’

Dollar index nears highest levels this year

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As the dollar sets forth its winning streaks and looks for a tenth consecutive gain ahead of US Fed Char Jerome Powell's speech on Wednesday, some signs are starting to mount that the rally of the greenback might come to an end.

Forex experts said while the continued robust activity data in the US and the ECB signalling the end of its rate hiking cycle accounted for the greenback’s renewed rally over the past two days, the winning streak would not last.

The dollar index (DXY) has edged up, reaching 105.41 on Monday. This is just a sigh away from the 2023 high near 105.88. Should the DXY be able to close above there for the week, expect the greenback to go even stronger in the medium-turn, they said.

“On the downside, the 104.44 level seen on August 25 kept the Index supported on Monday, not allowing the DXY to sell off any further. Should the uptick that started on September 12 reverse and 104.44 gives way, a substantial downturn could take place to 103.04, where the 200-day Simple Moving Average (SMA) comes into play for support,” forex analysts said.

The euro was up 0.1 per cent against the dollar at $1.0667. The yen was up a similar amount at 147.69 to the dollar, with traders out for a Japanese public holiday. Traders were looking towards central bank decisions later in the week which could shake up the currency market.

The obvious catalyst for a correction lower for the dollar is the US FOMC’s policy meeting on Wednesday, Jonas Goltermann, deputy chief markets economist, at Capital Economics, said.

“Indeed, despite the dollar’s ongoing strength, we think its medium-term prospects are starting to look less bright, for three key reasons. First, our base case is that, because the disinflation process is more advanced in the US than Europe, the FOMC ends up moving a bit earlier than that, and the ECB (and most European central banks) a bit later. That would turn interest rate differentials back into a headwind for the greenback once the FOMC shifts course,” said Goltermann.

“Another factor that’s likely to work against the dollar is the growing pushback from the authorities in China and Japan against the depreciation of the renminbi and the yen,” said Goltermann.

"In the grand scheme of things we're quite positive on the dollar," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. "The U.S. economy is outperforming both Europe and Asia, especially China."

Many analysts expect that stark divergences in economic growth and yields will keep the dollar mostly propped up, particularly against the euro.

Sterling has slid nearly 6.0 per cent against the dollar since mid-July, while the euro has dropped more than 5.0 per cent as the British labour market and economy and the euro zone economy slowed.

Carol Kong, economist and currency strategist at Commonwealth Bank of Australia, said she expects the yen to be volatile leading up to the policy meeting and that investors may have potentially misinterpreted Ueda's comments.

"Dollar/yen can definitely track higher ... particularly if Governor Ueda sounds dovish and dashes hopes of policy tightening at the upcoming meeting," she said.

Meanwhile, oil prices are at around $94, adding a layer of complication to central banks' growth-inflation dilemmas. Oil is also on track for its biggest quarterly increase since Russia's invasion of Ukraine in the first quarter of 2022.