When it comes to the U.S. dollar, everyone seems to agree on two things: It will keep soaring, and everyone’s too bullish.
The U.S. Dollar Index, 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.”
Read More Central banks could send dollar higher: Doll