The dollar’s uptrend looks set to resume next year

Nov 24 (Reuters) – What appears to be the end of the US dollar uptrend could lay the foundations for a resumption of the trend next year.

There has been little change in factors supporting the dollar but huge and rapid change in its value most likely due to how traders were positioned.

The number invested in the dollar is said to be enormous with Bank of America’s survey showing dollar longs extremely overcrowded, while CFTC data showed longs close to 2022’s high in August.

The motivation to alter these bets dramatically came from small changes in fundamentals that continue to support the dollar, and the US currency is now approaching the target for minimum technical correction of its prior decline. Because many traders were booking profits and profitable bets are often re-established, this is a likely point for a resumption of the uptrend.

The other major weight on the dollar was the hundreds of billions sold by central banks intervening, recently spearheaded by the Bank of Japan. This will ebb or stop altogether as yen strength is counterproductive to the BOJ’s own policy, while other central banks intervening massively – like India – need to rebuild foreign exchange reserves, supporting the dollar.

Yet, the biggest potential support for the dollar is the Federal Reserve that has to deal with the inflationary impact of a weaker currency, which may require interest rates to rise even more – or to stay high for longer – than currently expected.

(Jeremy Boulton is a Reuters market analyst. The views expressed are his own.)