The dollar has been on a tear recently, rising to a seven-year high against the yen and a two-year peak against the euro last week, amid signs of economic strength in the U.S. and weakness in Europe and Japan.
But that doesn't eliminate the risk of a drop by the greenback, experts says. One weak economic report in the United States could do the trick.
"U.S. dollar speculative positioning is increasingly becoming a very crowded trade, which leaves it more vulnerable to pullbacks in the near-term on the back of disappointing economic data from the U.S., which acts to dampen Fed rate hike expectations," Lee Hardman, currency analyst at Bank of Tokyo Mitsubishi, wrote in a commentary obtained by CNBC
Economists expect the Federal Reserve to begin raising interest rates around the middle of next year. Meanwhile, the Bank of Japan announced a huge increase in its easing program two weeks ago, and the European Central Bank continues to talk a big easing game.
"If at some point the Fed expresses concern about the headline inflation trend, it will be a problem and could see unwinding of U.S. dollar longs in bigger sizes," said Jens Nordvig, managing director and head of fixed income and currency strategy at Nomura.
Meanwhile, Mohamed El-Erian, chief economic adviser at Allianz, says that the dollar's strength could cause trouble.
"This dollar rally, the result of genuine economic progress and divergent policy developments, could contribute to the 'rebalancing' that has long eluded the world economy," he wrote in an article for Project Syndicate
"But that outcome is far from guaranteed, especially given the related risks of financial instability. . . . Sudden large currency moves tend to translate into financial-market instability."
© 2023 Newsmax Finance. All rights reserved.