Market and product

With the dollar having strengthened beyond levels supported by economic data, a powerful force of potential selling seems set to erupt at any time.

A correction in the greenback may be bound to happen, market players are murmuring for a second time this year.

The first was in early 2016, when the dollar advanced around the time of the Federal Reserve rate increase of last December. The hike had sparked fears of an exodus of funds from emerging economies and the resulting market turmoil. Rumors even flew that Group of 20 financial ministers and central bankers agreed in February to guide the greenback down.

While its unilateral rise has come to a halt, the dollar remains strong. The Intercontinental Exchange's index indicating the greenback's international value slid from around 100 at the start of the year to 93 at one point in April but has climbed back up to flirt with 100.

Buying of dollars with an eye toward a Fed hike by year-end is picking up pace. Overseas speculators were net buyers of the greenback to the tune of $19.5 billion as of Oct. 25, according to Mizuho Bank. Foreigners' position has come a long way from their net selling at one point in April and May.

It is understandable that investors are eager to buy the dollar amid growing anticipation of a Fed rate increase. The currency is easy to exchange, too. But the economic data does not support the level it has reached.

The interest rate spread is one such piece of data. The ICE's dollar index and the interest spread with other major economies had moved in tandem until the first half of 2014, but the greenback has since risen significantly more, said Ryota Sakagami of JPMorgan. The spread refers to the difference between the yield on two-year U.S. Treasury notes and the weighted average of two-year-bond yields in six economies, including Japan, the eurozone and the U.K.

The growing U.S. current-account deficit would normally work to weaken the dollar. Yet the greenback remains strong despite the deficit increasing 50% over roughly two years to about $120 billion for the April-June quarter.

Another piece of the puzzle involves the U.S. consumer price index. The CPI edged up 1.5 percentage points in September, higher than the mid-0% range for the eurozone and negative territory in Japan.

"Based on the theory of purchasing-power parity, the dollar would face increasing downward pressure," said Daisuke Karakama of Mizuho Bank. - nikkei.com