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Highlights
- US dollar shows signs of slowing momentum after a recent rally.
- Technical indicators suggest limited short-term upside for the currency.
- Market views on the dollar are becoming more balanced and less bullish.
The rally in the US dollar, partly driven by post-election sentiment in the United States, appears to be encountering resistance. Metrics indicate the bullish momentum spurred by economic optimism may have peaked, with traders expressing caution over the currency’s near-term trajectory.
Bloomberg's Dollar Spot Index, a comprehensive gauge of the currency's performance, dropped for a third consecutive session, marking a shift from its recent two-year high. Momentum indicators, such as the slow stochastics, suggest the dollar may have entered overbought territory, further limiting its upward potential. Additionally, JPMorgan's Emerging Market FX Risk Appetite Index flagged a signal to ease dollar positions as of November 15, underscoring this shift.
The rally in the dollar, which began in late September, has been fueled by market expectations surrounding President-elect Donald Trump’s economic policies. His proposed tariff hikes and concerns over potential inflationary pressures have contributed to the dollar’s strength. These factors have also heightened market speculation that the Federal Reserve could hold off on rate cuts, further bolstering the dollar's appeal.
However, trading activity has become less one-sided, according to market participants. Traders report a more circumspect view of the dollar, reflecting a moderation in previously strong bullish sentiment. Antony Foster, head of Group-of-10 spot trading at Nomura International, noted that the "strong-dollar trend" seen after the election appears to be navigating "choppy waters."
While the Bloomberg Dollar Spot Index has risen by 5.3% in 2024, this growth is now being questioned as technical and market factors weigh on its trajectory. Momentum indicators such as the dollar's slow stochastics reinforce concerns about its overbought status. This technical signal often suggests a potential reversal or consolidation phase for the currency.
As the world’s reserve currency, the dollar’s movements have far-reaching implications. Its recent slowdown may also reflect broader economic uncertainty, including the global impact of inflation, trade policies, and Federal Reserve actions. While market players remain watchful, the dollar’s future direction hinges on a delicate balance of technical signals, policy developments, and economic conditions.
This moderation underscores a shift in market sentiment, suggesting that the dollar’s rapid gains may stabilize or face further resistance in the near term.
