Investors have growing doubts about the dollar as they question the strength of the U.S. economy and the likelihood that the Federal Reserve will taper its monetary policies.

The WSJ Dollar Index — which gauges the dollar against seven heavily traded currencies — is down 4 percent in the past month and hit a seven-week low on Friday. This comes after the dollar hit a three-year high in early July and boasted gains of 8.3 percent for the year, according to The Wall Street Journal.

In May, bullish bets in the futures market rose to the highest level since 2007. Since then, investors have slashed those bets on the dollar nearly in half, The Journal notes.

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Investors' attraction to the greenback was largely attributed to the prospect of robust economic growth. There were wide-scale expectations that the Fed would apply the brakes on monetary policy, boosting the dollar's value and sending a positive message about the economy.

But recently weak data have prompted suspicions that the economy may not be strong enough for Federal Reserve to taper as soon as expected.

"We are at this turning point where investors aren't sure whether this strong-dollar thesis is really going to hold up," Samir Sheldenkar, an investment partner at Harmonic Capital Partners, tells The Journal.

His fund cut its bets on the dollar due to weak employment data, which is known to be a key consideration for the Fed.

Rising Treasury yields also serve as a source of strength for the dollar. Chatter about tapering prompted many investors to abandon emerging markets and seek refuge in U.S. bonds. Yields on the 10-year hit nearly a two-year high in July, according to the WSJ. But now yields have started to cool off.

"The market found that it got a little bit ahead of itself" in its optimism on the dollar, Christopher Brandon, a managing director with Rhicon Currency Management, tells The Journal. Treasury yields will have to rise above 3 percent to trigger another surge in the greenback, he projects.

And though the dollar may still be investors' currency of choice, other currencies, including the euro, are looking more attractive. The euro has gained appeal as the region seems to be pulling out of its long-running recession, albeit slowly.

"The second quarter should mark the end of the recession in the euro area, but the recovery will be excruciatingly slow. We're not getting the champagne out yet," Nick Kounis, head of macro research at ABN Amro Bank, tells Bloomberg.

"The dollar needs confirmation that this economic divergence is indeed playing out," Stephen Jen, founding partner of London hedge fund SLJ Macro Partners, tells The Journal. "We need to see better data in the U.S., and we need to see weak data in the rest of the world. If this thesis is undermined, then the dollar will struggle."

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