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Investors scanning the horizon for risks might want to question the consensus call for a weaker dollar, particularly after the market's bullish view at the start of 2017 proved ill-founded.
Twelve months ago, the median prediction in a Bloomberg survey was for the greenback to extend a post-election surge, and hedge funds were jumping on board. As it turned out, the dollar peaked days into the new year on its way to a loss of almost 9 percent in 2017.
Now many analysts see more pain ahead for the greenback, even as the Federal Reserve is pledging to lift rates further and a $1.5 trillion tax overhaul is about to start filtering through the economy. But some prognosticators say the prevailing view is wrong again, predicting a dollar rebound that could upend rallies in assets from commodities to emerging markets.
"There may be a little bit of complacency that, because the dollar hasn't benefited from good news in Q4, it can't go up at all in Q1 as supportive developments continue to accumulate," said Daniel Katzive, head of currency strategy in North America at BNP Paribas SA.
The bearish dollar trade hinges on the idea that global growth will pick up this year, prompting central banks to follow the Fed in paring stimulus and raising rates. This in turn may boost the appeal of other currencies against the greenback. The median forecast in a Bloomberg survey has the euro strengthening to $1.25 in 2019, from $1.2070 now.
The bias toward a weaker dollar over the next six months is evident in the options market, where demand for euro calls exceeds the appetite for euro puts, as the chart below shows.
But there's plenty of risk to that stance. For one thing, U.S. economic strength could spur the Fed to step up the pace of its tightening.
BNP's Katzive sees scope for dollar gains in coming months even as he predicts a loss on a full-year basis. He says it could appreciate in the first half past $1.15 per euro, and to 115 yen from 112.75. In his view, the driver for the strength will come from Fed hikes and the benefits to households and corporations from the tax overhaul.
Marc Chandler at Brown Brothers Harriman & Co. also sees rate differentials working in the dollar's favor, especially against the euro.
"The divergence trade hasn't peaked," said Chandler, the bank's head of currency strategy in New York.
As the greenback appreciates, the traditional relationship between the currency and commodity markets will reassert itself, with a climbing U.S. currency making those dollar-denominated assets more expensive, Chandler said. That could dim demand and imperil rallies in crude and copper, which have surged since mid-2017.
Some investors might be coming around to the idea that the currency's selloff has gone far enough. Hedge funds and other large money managers turned net bullish on the dollar last month for the first time since June.
Ben Emons at Intellectus Partners LLC sees the U.S. currency drawing support from a framework known as the "dollar smile" formula. This approach holds that the greenback tends to strengthen when the U.S. economy outperforms amid a mediocre global expansion and also when investors seek a refuge from uncertainty.
"The dollar strengthens on a stronger outlook, but because there is uncertainty, the dollar can strengthen even more," Emons, the firm's chief economist, wrote in a note this week. Tensions on the Korean peninsula are also poised to generate dollar strength, he wrote.
A greenback rebound, combined with a bounce in commodities on tighter supply, is shaping up to be the "trade of the year," he said
– With assistance from Robert Fullem