After nine straight months of persistent strength against the rivals, the dollar's rally paused in April, with the dollar index falling 4 percent, hurt by signs the US economy shrank in the first quarter of 2015.
Many analysts, however, say what is going on now is only a correction in its steady and strong march higher, CNBC reports.
"Similar to the FOMC believing the sudden halt to real GDP growth in the U.S. will prove 'transitory' we believe the reversal of dollar appreciation in April will prove unsustainable," writes Bank of Tokyo-Mitsubishi UFJ's FX Strategy team led by Derek Halpenny. Strategists at the bank add that the confirmation that US's GDP hampering is transitory will be evident in the upcoming months bringing back expectations for the FOMC raising rates in September. They also consider the euro will fall below parity against the dollar by the first quarter of 2016 to 0.96.
"The peak in the last two big dollar cycles in 1985 and 2002 occurred respectively six months and 13 months after the funds rate had peaked AND rates started coming down," writes Alan Ruskin, head of G10 FX Strategy for Deutsche Bank. "This highlights what an aggressive call it would be to suggest the U.S. dollar has peaked even before U.S. rates have started going up!"
Bullish analysts say it will take better economic data in the U.S. to convince the currency market that the Fed is actually preparing to move.
"The second lowest weekly claims figure since the 1970's hammers home
the fact that whatever else ails the U.S. economy, the labor market is
in good shape," according to Kit Juckes, senior FX strategist at Societe Generale.
The dollar will become all the more appealing when the US central bank finally raises interest rates.
"Even modest Fed tightening say to a terminal rate
of 200 basis points will leave the U.S. dollar as a high yielder,
probably with the highest short-term yields in G10 outside the New Zealand dollar!" Ruskin writes.
Currently, investors will anticipate the non-farm payrolls report for April due on Friday.
Market "needs the expectation that monetary policy will normalize. The Fed does not want to give guidance in advance of lift-off because then it will wear the consequences on the dollar, bonds and equities without the pleasure of accomplishing liftoff," says Steven Englander, Global Head of G-10 currency strategy at Citigroup.
