Source: Golden Ten Data

The dollar's winning streak seems to have run out.

Strategists at Barclays Bank, Morgan Stanley, and National Australia Bank have warned that bets on the dollar are becoming increasingly tense.Options positions show that demand for new positions in the US dollar is the weakest in two months. The volatility indicator shows that the currency's expected volatility is the lowest in 18 months.

The Bloomberg dollar index has been fluctuating sideways since it hit its peak so far in the year earlier this month. Even if US Treasury yields soared to their highest point in more than a decade last week, it did not give enough impetus to the dollar's rise.

“A sharp drop in the US dollar is coming,”Themistoklis Fiotakis, head of foreign exchange research at Barclays Bank in London, said.

This isn't the first time Wall Street has called for the dollar to collapse, yet the US dollar has continued to rise ever since. In July, some people thought that the fall in the US dollar marked the end of the dollar's gains, but soon, this decline turned into a roaring rebound. Recently, safe-haven demand brought about by geopolitical turmoil in the Middle East has spurred sporadic demand for the US dollar. Despite the Bank of Japan's decision to ease restrictions on treasury bond yields, the dollar climbed higher on Tuesday.

However, according to a recent MLIV Pulse survey,Enthusiasm for the dollar may have peaked in SeptemberOther analysts, like Fiotakis, believe that dollar bets are now too crowded. According to data from the US Commodity Futures Trading Commission (CFTC), in the week ending October 10,The total long positions of leveraged funds (the most speculative type among investors) on the ICE US dollar index rose to nearly 4,600 contracts, the highest since July.

Rodrigo Catril, a Sydney-based monetary strategist at the National Australia Bank, said: “In the context of the usual favorable drivers, the dollar failed to be successfully pushed up, which indicates that the strong rally from mid-July to early October has come to an end. The dollar's long position provides moderate resistance to the further strengthening of the US dollar.”

The signals from the options market are also alarming.

One-month risk reversal — A short-term indicator that measures bullish sentiment and positions, is approaching a three-month low, indicating that dollar buyers are unwilling to catch up with the dollar at current levels. J.P. Morgan's three-month implied exchange rate volatility indicator has fallen to its lowest level since February 2022. This indicates that investors do not expect the dollar to fluctuate drastically in the next few months.

For some investors, the dollar remains the “only option” despite its problems. Johanna Kyrklund, chief investment officer of Schroder Investment Management Ltd (Schroder Investment Management Ltd) based in London, said that even if European economic growth slows, the US economy remains strong, and America's special nature and high yield are very attractive.

At an event earlier this month, she said, “We really lack a solid alternative. Just like people jokingly say, 'The rumors about my death have been seriously exaggerated', I think the US dollar is the same.”

However, the MLIV Pulse survey released this week shows that the market's enthusiasm for the US dollar seems to have stagnated. In September, 60% of respondents expected the Bloomberg dollar index to rise further; this month, this figure declined by 1 percentage point.

Nor is history on the side of the US dollar. In the past decade, the Bloomberg dollar spot index has stayed above 1,280 points for more than a few days only twice. The first time was in March 2020, when safe-haven demand was high at the beginning of the global COVID-19 pandemic; the other time was in the second half of last year, when the euro was trading at an equal price with the US dollar.

Morgan Stanley strategists James Lord and David Adams began last weekAdvise clients to withdraw from long US dollar positions。 The two strategists said that the US dollar has already priced many favorable catalysts, including rising yields and a better US economy compared to the rest of the world.

According to Gareth Berry, strategist at Macquarie Group Ltd. (Macquarie Group Ltd.) in Singapore, there is still a possibility that the US dollar will “take the last resort” as investors seek safe havens, but the prospect that US interest rates will peak and eventually fall means “time will not be on the side of the dollar.”

edit/new