Dollar Rally has Matured Says JP Morgan

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The Dollar rally has reached maturity as the U.S. exceptionalism story is fading says JP Morgan.

The Dollar is by no means in the early stages of a cyclical downturn, but strategist at the Wall Street bank say it could be time to pare 'long' exposure.

Essentially, betting on fresh upside is no longer as attractive as was the case in recent months.

"We have long-held a bullish view on the dollar; do recent developments warrant a re-think? In our view, it is prudent to tactically reduce USD length given the balance of positioning, valuations and some signs of fading US exceptionalism," says Meera Chandan, an analyst at JP Morgan in London.

The bank's bullish Dollar view has been based on two motivating pillars: the dollars carry advantage despite being a defensive currency and persistent US exceptionalism.

"The former remains intact, but the latter (persistent US exceptionalism) appears to be in early stages of losing its sheen," says Chandan. "This, combined with crowded positioning and valuations make it prudent to tactically reduce USD length. Over the past week, we have trimmed USD exposure and introduced hedges to protect against this outcome."

The Dollar is 2024's top-performing currency but it has seen this outperformance fade since late April. This as markets have fewer interest rate cuts to 'price out' of expectations than was the case at the start of the year.

Last week's softer-than-forecast labour market data was the latest of a string of disappointing domestic data prints that suggested the economy might finally be cooling.

"But we caution USD bears that is still too early to declare victory given still-firm US inflation and lack of visibility on the durability of the recovery outside the US as well as upcoming US elections," says Chandan.