LONDON – In all the huff and puff over Greece in the past month, a number of major banks and investors have decided the main driving force behind the dollar's 18-month surge against the euro is evaporating.
Between last May and this March, the dollar surged 25 percent, or 35 cents, in value against the euro and 27 percent against a basket of currencies.
That rarest of things in currency markets, a consensus trade almost all major banks and asset managers bought into, was based on the assumption that U.S. rates would rise this year and next while Europe's stayed flat.
But with some money market interest rates implying a full percentage point increase in official U.S. rates by the start of 2017 and the European Central Bank four months into a program of quantitative easing, the question is how much of that has been priced in.
John Normand, head of FX, commodities and international rates strategy at U.S. bank JPMorgan, said last week the euro exchange rate provides for 2 full points in U.S. rate rises over the next two years and may have gone too far.
"There is a lot of evidence that the currency market has front-loaded a lot on the Fed," he told a half-year briefing with journalists this week.
"We are still in a fragile world outside the U.S. and that suggests a bullish dollar bias. But if the Fed does raise by 25 basis points a quarter over the next year, that gives you pretty high odds that the dollar peaks early next year."
Normand has the euro bottoming out at $1.03 next year before recovering to $1.06 in 2017.
U.S. jobs numbers came in below expectations on Thursday, another blow to those, like Deutsche Bank and Goldman Sachs, who have predicted the euro will sink past parity with the dollar by 2017. They and other dollar bulls have spent the past three months providing various explanations for a halt in progress.