The dollar has neared its highs for the year. Its appeal as a safe-haven asset has been bolstered by fiscal concerns and fresh political uncertainty in Europe.
At the same time, the sustained rise is sparking fears that the rally is becoming overextended.
A series of US economic data releases due in the coming days could determine how long the rally lasts. By some metrics, the index is in overbought territory, signaling a potential reversal.
As of 15:27 Moscow time. Major currency pairs traded as follows:
* EUR/USD fell 0.40% to 1.1207 (year-to-date: -4.65%)
* GBP/USD fell 0.13% to 1.3223 (year-to-date: -1.91%)
* USD/JPY rose 0.21% to 158.19 (year-to-date: +0.97%)
* USD/CHF rose 0.24% to 0.8307 (year-to-date: +4.84%)
* AUD/USD rose 0.06% to 0.6962 (year-to-date: +4.30%)
* USD/CAD rose 0.01% to 1.4253 (year-to-date: +3.88%)
* NZD/USD fell 0.43% to 0.5590 (year-to-date: -2.95%)
* EUR/JPY fell 0.20% to 177.28 (year-to-date: -3.72%)
* USD/RUB rose 1.59% to 85.125 (year-to-date: +8.10%)
* EUR/RUB rose 1.14% to 95.366 (year-to-date: +3.10%)
The outlook for US interest rates will be in focus. Key releases this week include the ISM services PMI, employment data, and the University of Michigan consumer sentiment index on Friday. Investors will also examine the minutes from the Fed's September meeting—where the regulator raised rates for the first time in three years—as well as speeches by Fed officials. "An overbought and overvalued dollar could prove vulnerable to any negative surprises in US data this week, especially if they cause investors to reassess the strength of the FOMC’s hawkish consensus," says Valentin Marinov, Head of G10 FX Research and Strategy at Credit Agricole.
One of the bank's models currently recommends long positions on the pound and the Swedish krona against the dollar.
The dollar's rise has been driven by euro weakness and expectations of further US rate hikes. However, some analysts foresee a potential reversal if investors begin to question the Fed's policy trajectory. Forecasters also warn that fresh concerns regarding the US fiscal position could knock the dollar off its highs.
Analysts expect the euro to weaken further, though many acknowledge that its recent sell-off was triggered by tensions in European bond markets and could subside if those fears ease. The euro’s decline against the dollar has been relatively modest compared to its drop against the Swiss franc and Norwegian krone, suggesting that bearish investor bets are not directed solely against the dollar.
Morgan Stanley, which recently adopted a bullish stance on the US currency, is also exercising caution following the latest rally.
"We worry that a sharp rise in the dollar's negative risk premium could trigger a forced unwinding of long dollar positions," wrote the bank's currency strategists, led by David Adams. "We would therefore prefer to buy on dips rather than at current levels."