The dollar neared its strongest level this year as fiscal strains and political uncertainty in Europe boosted its haven appeal. The Bloomberg Dollar Spot Index climbed as much as 0.4%, extending a three-week rally ahead of key US economic data. The index is at overbought levels, raising concerns about a potential reversal.
Investors are watching upcoming readings including the ISM services PMI, jobs data, and University of Michigan consumer confidence. Minutes from the Federal Reserve’s recent meeting and speeches by policymakers will also be closely watched. A weaker euro and expectations for further US rate hikes have powered the dollar higher, though some see scope for reversal if the Fed’s policy path is questioned.
Forecasters warn that renewed concerns over Washington’s fiscal position could knock the dollar off its highs. While currency forecasters expect further euro weakness, many acknowledge that its latest selloff has been driven by strains in European bond markets and could unwind if concerns ease. The dollar’s latest rally has also raised caution at Morgan Stanley, which recently shifted to a bullish stance on the US currency.
FX strategists led by David Adams warned that a sudden increase in USD-negative risk premium could lead to a stop out of USD long trades, recommending buying the dip rather than at current levels.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing