(Bloomberg) --The dollar is heading for its worst week since the pandemic struck, yet analysts think a long-running stampede for the greenback isn't over yet.
The Bloomberg Dollar Spot Index has slumped nearly 3% this week, its biggest loss since March 2020. Investors had been trimming bets on the dollar ahead of Thursday's US inflation data, with a slowdown in prices leading it to get pummeled in the index's worst one-day performance since 2009.
The latest selling has knocked the dollar gauge 6% below a record peak hit in late September, with the yen the main beneficiary. While the moves suggest the greenback could stay under pressure in coming weeks on bets the Federal Reserve will slow its pace of interest-rate hikes, market participants remain cautious that the trend will continue in the longer run.
"The dollar peak might be past us, but a dollar downtrend may not be there yet," ING Groep NV analysts wrote in a note, adding that the Dutch bank remains "moderately bullish" on the dollar into year-end.
This year's strength in the greenback, taking it up more than 20% from mid-2021 to September, rippled across markets, exacerbating the cost of dollar-denominated goods such as oil and complicating policy around the world. Global stocks and bonds rallied Thursday as the dollar slid.
Strategists at MUFG said that a weaker dollar was now "justified," while adding that the scale of the move clearly reflects to some degree the "pain trade" seen earlier in the week when investors cut back on overly big bets on the dollar. Instead funds have been piling into the yen, up more than 5% this week after hitting a three-decade low less than a month ago.
Dollar Becomes a Pain Trade, And Not Just for Bulls: Trader Talk
But with a global recession looming, a war in Ukraine continuing and growing signs of a slowdown in China, it could be too soon to aggressively sell the haven currency. That led MUFG to avoid saying it was time to turn bearish.
"It's inevitable that once the turn has come there was going to be a sharp move to the downside, which is what's playing out," said Lee Hardman, a currency strategist at MUFG. "Now, the risk is that the move will be overdone, as we're still far from an end to the Fed tightening cycle at this point."
Traders will be on the lookout for any further signs of a cooling US economy that could enable the Fed to take the foot off the gas following a series of jumbo hikes. Four officials have
For technical chart watchers, the dollar could extend its recent losses all the way down to August lows, according to several momentum indicators. A key support level, the 32.8% Fibonacci retracement of the May 2021-September 2022 rally, is 1.3% lower than current spot levels.
That could be as far as the retreat goes, if options are any guide. Risks reversals, a barometer of market positioning and sentiment, have retreated to the least bullish sentiment for the greenback since May, yet show that investors aren't convinced of a huge sell-off.
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