This may be a key turning point for the dollar which is being undermined by the likely end of the U.S. tightening cycle implied by futures markets when traders are betting that more hikes will support their bets on the U.S. currency rising. Traders have sold more than $28 billion since July flipping from a big short position to the largest bet on a rise in almost one year. During this period the dollar index has gained roughly 7%, becoming overbought in the process. The index which was traded 99.55 toward the end of July has dropped slightly from October’s 107.34 peak reaching 105.60, could fall much further if traders equate for a recent change in the expected path of U.S. interest rates. Only last week, FX traders were looking for another rate hike following a big payrolls report. Instead, the chance of a hike has dropped significantly with only a one in four chance of a rise in the future.
The next move in interest rates is expected to be a cut, with that now seen in June from July and perhaps May when the implied probability of a cut is around 45%. By the end of next year the U.S. interest rate is expected to have fallen by 100bps. It is highly unlikely (but not impossible) that the recent downturn in expectations for U.S. interest rates is factored into currencies, and changes are big enough to suggest that the dollar has reached a significant peak from which there may be a substantial decline as traders refocus on an easing cycle.