The greenback has been red hot, but the rally's days are likely numbered.
The dollar index has soared around 8 percent since its February low, but I believe we've seen the top for 2018. A few factors are at play here, including the euro's recent trading pattern and the Federal Reserve's hiking path.
Eyeing the euro...
The euro is the most liquid, highly traded currency paired against the dollar, and last week traders turned the most bearish on the euro since last April; that was just before it rallied 17 percent. If we see this kind of behavior again, the dollar would come under pressure against a rising euro.
Last week's low in the euro, amid those fears, tested and held a trend line dating back to 2015, before bouncing more than 1 percent. We believe this is just the start.
...and the yuan, too
The yuan's devaluation has been another major factor in the dollar's ascent. China has been accused of weakening its currency to make its exports more attractive and thus combat tariffs.
We believe the U.S. and China will make significant headway on trade in the coming weeks, fueling a rally in the yuan and placing pressure on the dollar.
Finally, the Federal Reserve has already priced in two more hikes this year and three next year. This brings a proverbial ceiling to how much more hawkish it could become.
If global uncertainties clear up, we envision other major central banks will make larger strides down a hawkish path relative to what the Fed could do. This would weaken the dollar in a manner, similar to last May, under the same circumstances.
Back when the dollar peaked in the first week of 2017, on the heels of the 2016 U.S. presidential election, sentiment could not have gotten any more bullish. In hindsight, this start of a long-term downtrend, and this most recent bounce in the dollar presents an opportunity to sell.