(Bloomberg) — The dollar neared its strongest levels this year as fiscal strains and renewed political uncertainty in Europe boosted its haven appeal, even as its run of gains stoked concerns the rally is becoming overstretched.
The Bloomberg Dollar Spot Index climbed as much as 0.4% as the euro weakened. That extended a three-week run of gains ahead of a slew of US economic data in coming days that may determine the duration of the rally. The index is at overbought levels according to some measures, indicating that it may face a reversal.
“Investors are gravitating toward the dollar because the US continues to offer relatively higher yields, a resilient economy and a safe-haven destination amid geopolitical uncertainty,” said Nathan Thooft, a senior portfolio manager at Manulife Investment Management. He called the rally “relentless” but maintained the view that the move is a tactical advance.
The dollar is being lifted by traders’ interest-rate outlook. The market is pricing in more aggressive rate increases in the US compared with many other developed economics.
The euro, lagging many other peers in the Group of 10 against the greenback, was weighed down by fiscal risks in France, with traders on the alert for signs of contagion in Europe’s government bond market after a selloff triggered memories of the region’s debt crisis 15 years ago. Elevated energy prices over the war in Iran, have also weakened the euro, while aiding the dollar.
Analysts at the the BlackRock Investment Institute, said that the dollar is “surprisingly resilient” due to fundamental factors, but were skeptical that the US central bank will hike rates as much as the market is pricing. Traders now see more than 80 basis points of rate increases through next September, including one rate hike this year.
“With markets pricing more Fed tightening than we think will materialize, there is limited scope for a sustained dollar bull run,” analysts including Jean Boivin, Wei Li and Roelof Salomons at BlackRock wrote Monday.
The relative-strength index for Bloomberg’s dollar gauge — a measure of momentum — climbed above 70 a week ago and has remained at that level as of Monday afternoon, indicating the rally is becoming stretched. The dollar’s latest rally has also raised caution at Morgan Stanley, which recently shifted to a bullish stance on the US currency.
“We are concerned that a sudden increase in dollar-negative risk premium could lead to a ‘stop out’ of dollar long trades,” FX Morgan Stanley strategists led by David Adams wrote in a note. “The result is we would look to buy the dip, rather than buying at current levels.”
(Updates market pricing. Adds comments from Manulife and BlackRock.)
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