When it comes to the U.S. dollar, everyone seems agrees on two things: It will keep soaring, and everyone’s too bullish.
The U.S. Dollar Index (Exchange: .DXY), which tracks the currency by comparing it to a basket of six currencies (though it is heavily weighted toward the euro) is up 15 percent in six months. In fact, the index has risen in 13 of the last 15 sessions, taking it to a nine-year high.
The impetus behind the move is clear. Firstly, the U.S. economy is greatly outperforming economies across the globe. And in turn, this means Federal Reserve policy will tighten even as other central banks are loosening. That would translate into higher short-term yields for those holding dollars, especially on a relative basis, thus making it more attractive to hold greenbacks.
But precisely because that is such a widely held belief, the bullish dollar trade has become just the kind of “no-brainer” of which traders tend to be wary.
“Every trader I talk to expects the Dollar Index to go higher over the year,” Jim Iuorio of TJM Institutional Services said Thursday on CNBC’s ” Futures Now .” “But when you get to the point where everybody seems to be short the euro and the yen, then I think the risk becomes to the upside” for the euro and yen, and consequently to the downside for the dollar.
Many currency experts agree, saying that a near-term pullback is likely.
“Positioning is very extreme right now. Everyone is bullish, and it’s just one-sided,” said Win Thin, head of emerging market currency strategy at Brown Brothers Harriman. “Despite the skewed positioning, we still do favor the dollar, but we’d expect to see some correction at some point to get rid of the positioning skew.”
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In a Thursday afternoon interview, Thin said the downside move could come as soon as Friday morning, when the Bureau of Labor Statistics is slated to release the December employment report.
While maintaining that the U.S. economy appears to be growing nicely, Thin noted that “payrolls data is volatile, so we could get a weak number. That could cause people to take profits and square out their positions.”
Kathy Lien, managing director of FX strategy with BK Asset Management, is of a similar mind.
“After the November number was so strong, a pullback would be natural. The question is whether the unemployment rate drops. I think it will, but if it doesn’t, then the dollar will pull back,” she said in a phone interview.
However, like Thin, she would view such a drop as a buying opportunity.
The dollar “is at extremely lofty levels, and if you’re still looking to buy the dollar, I think there will be lower levels to buy it at,” she said. “But in the long term, the trend is still upwards.”
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- U.S. Dollar Index