The dollar has rallied too far, too fast since July on the back of good data and a small change in the FOMC language but as long dollar positions became excessive, this week's FOMC minutes were a catalyst for a clear-out.
"Maybe the dovish nature of the minutes is a reminder that we have not yet moved to a ‘strong dollar’ phase, just a correction from excessive under-valuation, and downside pressure will continue to increase on high yielders, commodity currencies and the euro," SocGen argues.
In the US, SocGen notes that we are now back to data-watching as the economy is going into Q4 in good health, with solid employment growth.
"We have heard nothing to alter our view that the Fed will hike in June 2015, by which time the front end of the curve will have priced in several hikes, even as the FOMC successfully controls longer-term rate expectations," SocGen argues.
But while we watch US data, SocGen notes that the European outlook has taken a turn for the worse with recent data confirming that the Ukraine crisis and sanctions on Russia are hurting growth in Germany.
"It’s time for the FX market to stop looking for a stronger dollar, and focus on the risk of further euro weakness instead,"SocGen advises.
