The dollar sank to a three-month low as rising commodity pricesreignited bets that the global reflation trade will take hold in2018, dimming the greenback's appeal relative to currencies offaster-growing economies.

The U.S. currency fell against most major and emerging-marketcounterparts Tuesday as the Bloomberg Commodity Index reached itshighest level in about 11 months. Combined with reports showingstrength in Chinese and European manufacturing, there is probablymore pain ahead for the dollar as investors anticipate moneyflowing into other economies, said Mark McCormick at TorontoDominion Bank.

“The backdrop for the dollar is just not very good,” saidMcCormick, the bank's North American head of foreign-exchangestrategy. “The global reflation trade is progressing along and thebackdrop is that we're rotating into a regime shift and that comeswith a changing backdrop for capital flows.”

Dollar weakness will also persist through 2018 as more centralbanks move toward policy normalization, McCormick said. EuropeanCentral Bank policy maker Benoit Coeure suggested as much over theweekend, saying that unless inflation disappoints, there's a“reasonable chance” the central bank's extension of quantitativeeasing in October could be the final one.

Options are signaling that traders have started to prep for thepossibility of greenback losses. The dollar's one- and six-monthrisk reversals against the euro, a barometer of positioning andinvestor sentiment, both rose to the highest in a month inanticipation of a weaker dollar.

The greenback could catch a break as the U.S. tax-overhaul plantakes effect, said Brad Bechtel, a currency strategist atJefferies. Though American companies' estimated $2.6 trillion ofcash stashed overseas may already be mostly in dollars, thegreenback will still benefit from the return of funds held in othercurrencies, according to Bechtel.

That said, it's far from smooth sailing for dollar bulls,especially if investors see better value in other currencies withglobal growth picking up. Against that backdrop, the dollar faces acloudy outlook even as the Federal Reserve signals more rate hikesin 2018, Bechtel said.

“Commodities have been rallying across the board, and that'sputting some pressure on the dollar,” he said. “It's a tough roadahead for the dollar.”

From: Bloomberg News

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