LONDON/NEW YORK - After an unexpected rally that carried the dollar to 18-month peaks and saw it end 2018 as investors' top trade, the currency faces challenges in the coming year.
They include an expensive valuation, a flagging equity boom, waning cash repatriation by U.S. companies, and the possibility that the U.S. Federal Reserve will not raise interest rates as many times as signaled.
Hence the prediction in a Reuters poll this month that the dollar will end 2019 around 5 percent below current levels..
That flies in the face of the current trend, with futures showing dollar positioning near historical highs.
Furthermore, the Bank of America Merrill Lynch's monthly investor survey shows the greenback regaining the "most crowded trade" crown from the FAANG tech stocks group.
But the wheels have come off that investor bandwagon in recent years, as big bets have misfired on Bitcoin, tech and... the dollar, which markets had heavily bet against in late-2017.
(Graphic on 'USD and CFTC' - https://tmsnrt.rs/2A1CHPj)
(Graphic on 'Most crowded trade' - https://tmsnrt.rs/2R9NaSj)
"From a positioning perspective, the scope for the dollar to rally significantly is not there unless you see growth in the rest of the world really weakening and the United States continuing to be strong," said Eugene Philalithis, portfolio manager at Fidelity International.
On the economic front, jobs and housing data suggest a decade-long U.S. recovery is losing traction and a flattening bond yield curve is flashing the classic recession warning.
While the Fed raised interest rates in December and signaled it would stay the course on policy tightening, money markets reckon otherwise.