A six-month rally in the dollar has stalled in recent weeks on concerns about the US economic recovery, prompting some strategists to bet the tide may be turning against the greenback.
An index tracking the dollar against a basket of six major currencies breached key support this week, suggesting more losses could be in store. Activity in the options market and speculative positioning both showed a significant reduction in bullish sentiment toward the dollar.
Selling in the dollar accelerated this week after data showed slowing manufacturing and weakness in consumer spending, while Federal Reserve meeting minutes showed policymakers felt further stimulus may be needed if the recovery slows further.
"The turnaround in attitude toward the dollar has been remarkably swift," said Andrew Wilkinson, senior analyst at Interactive Brokers Group in Greenwich, Connecticut.
"The recent economic vulnerability set in motion by a slew of reports indicating slowdown has coincided with declining vulnerability of European governments and a pick-up in activity in the region," he added.
The US dollar index has lost 4.1 percent this month after rallying about 10 percent from January to June. The index made a decisive close below the key 84 mark on Tuesday.
"(It) was the most dramatic evidence we've seen so far that the dollar could be in for a few months of corrective action instead of just a few weeks," said Walter Zimmermann, chief technical analyst at United-ICAP in Jersey City, New Jersey.
The euro has rebounded 5.8 percent this month and 9 percent since hitting a four-year low around $1.1875 in early June.
For much of the time since the global crisis took hold in late 2008, the dollar has moved in the opposite direction of equities, rising when stocks fell as investors sought safety in US Treasuries and weakening when stocks rose.
But recent declines in stocks have failed to boost the safe-haven dollar as investors focus on worries about the US economy and the dollar's diminishing yield appeal. The spread between 2-year US and eurozone rates has widened against the dollar in recent weeks.
The 25-day correlation coefficient between the S&P 500 index and the dollar index was last at 0.21, Reuters data showed. In mid-May, the ratio was a strong -0.91. Analysts said risk sentiment will likely continue to drive the dollar's performance, though worsening US fundamentals could mean the dollar would sell off more in a risk-taking environment than it would rally in a risk-off scenario.
"It does not mean risk sentiment does not matter. But these other developments such as growth and interest-rate fundamentals can and should matter a bit more," said Robert Lynch, currency strategist at HSBC in New York.
Samarjit Shankar, managing director for global foreign-exchange strategy at BNY Mellon in Boston, said while fears of a US slowdown have grown, "risk appetite is not dying out completely," as evidenced by steady inflows into emerging market securities and solid bond auctions in Europe.
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