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The dollar is in a 'vibe-cession' say analysts, and sentiment will shift.
Bank of America says the dollar is in a 'vibe-cession' that is disconnected from relative economic data, interest rates, equities and market positioning.
That means the currency market faces a looming adjustment and the dollar could find itself back to winning ways. "Near-term USD upside risks look underpriced," says Alex Cohen, FX Strategist at Bank of America.
What's working against the dollar
"It's striking to us how low USD sentiment appears," says Cohen. "Clearly the market is more focused on the prospect of war resolution and expectations for a dovish Fed, and undoubtedly many entered the year in the bearish USD camp, much like we did. But in the near-term, we question how much lower this can take the USD."
In addition, expectations for the Federal Reserve also appear to be holding the USD back as markets have been firm in expecting the Fed to lower rates in 2026. Of late, they have started to realise that's unrealistic in the face of a new inflationary shock stemming from the Persian Gulf.
What's supportive of the dollar
Real-interest rate differentials have been widening more noticeably in the USD's favour of late, shows Bank of America's analysis.
U.S. equity markets are again outperforming global peers, aided by strong earnings and the expansion of the AI stock boom to the wider tech sector.
Bank of America thinks the USD will struggle to ignore this outperformance for too much longer.
The trade
For the dollar, "the balance of risks pointing to the upside," says Cohen. "We see near-term upside risks and prefer longs vs. GBP & CAD."
Buy dollars, says Donnelly
A favourite amongst serious retail traders is Brent Donnelly at Spectra Markets; his latest daily email says it's time to get long on the dollar against the euro, because a market regime change is nigh.
That regime shift is from a market that looks for Fed rate cuts and/or no rate movement at all, to rate hikes.
"Is it time to get long USD? I think so," says Donnelly. "I think EURUSD is best: U.S. stocks outperforming and U.S. economy substantially outperforming Europe. And now maybe, just maybe, the market is going to start pricing Fed hikes."
"The most interesting regime shift for markets and macro traders will be if the market starts to price in Fed rate hikes. This will light a fire under the USD and FX and bond market volatility," he explains.
Fed Governor Austan Goolsbee said on Monday that "we have an inflation problem in this country," a clear signal that the Fed's interest rate-setting committee cannot ignore the problem for much longer.
It was reported Tuesday that core inflation surprised to the upside at 2.8%, confirming it to be truly stuck above the Fed’s 2% target.
Core inflation is generated domestically, meaning it can be limited by higher rates at the Federal Reserve.
"Rate rises are now firmly back on the table as policymakers look to contain a price spiral that is starting to take hold," says Isaac Stell, Investment Manager at Wealth Club.