This was supposed to be the year of the mighty dollar, with the greenback rising along with the economy and the positive boost from Washington's anticipated pro-growth policies.
But so far, the dollar has been falling, even after it tried to rally back in February. The dollar index is down about 2.1 percent since the start of the year, and 1.4 percent since the Federal Reserve met last week.
"Dollar bulls are stuck in a quagmire," said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management.
The biggest factor may be that Fed policy and European Central Bank policy are not diverging as much as traders had expected. That means the difference between U.S. interest rates and European interest rates is narrowing, and since currencies take their cue from rates, the euro stands to gain as the dollar falls.
Federal Reserve officials hiked rates at the March 15 meeting but they held to a forecast for just two more hikes this year, less aggressive than some traders expected.
"The dollar's in this sort of no man's land. If the price action is not confirming the fundamentals, you always trust the price action, because there's something bigger the market is seeing that everyone else is missing."
The dollar index had already lost a half percent in the week running up to the Fed meeting, after the European Central Bank reportedly discussed at its March 9 meeting whether it could raise interest rates before ending its "quantitative easing" bond buying program. That raises the potential that the ECB, which has been easing policy, may ultimately move alongside the U.S. Federal Reserve to raise rates, putting the euro more in competition with the dollar.
"I think it's [the dollar] actually pretty well tracking interest rate differentials. Not only have U.S. rates come off a little, but euro zone rates surprisingly picked up, and I think that's what's driving that narrowing differential," said Robert Sinche, chief global foreign exchange strategist at Amherst Pierpont.
Schlossberg said the dollar is also reacting to the fact that no big breakthroughs have been made to move ahead the Trump fiscal agenda, particularly tax reform. The dollar had moved higher in anticipation that President Donald Trump, along with a Republican congress, could move quickly on de-regulation, stimulus spending and tax cuts for corporations and individuals. But the process has been slowed down by the efforts to repeal and replace Obamacare.
"The dollar's in this sort of no man's land. If the price action is not confirming the fundamentals, you always trust the price action, because there's something bigger the market is seeing that everyone else is missing," Schlossberg said. He said what the dollar is weighing could be a stock market sell off or a more sluggish economy.
Strategists also said the market was considering how G-20 financial leaders agreed to drop a decade-old pledge to resist protectionism in its communique this past weekend, at the request of U.S. Treasury Secretary Steven Mnuchin. But while that hung over the market, the dollar was reacting more to interest rates.
According to Brown Brothers Harriman strategists, the dollar index looks weak technically, and if it breaks 100, then the Feb. 2 low near 99.25 could be in play. The dollar index was at 100.36 at midday Monday, and while the index represents the dollar against a basket of currencies, it is heavily influenced by the euro. The euro was trading at $1.07 Monday.
"The technical conditions are pretty bad, so we think there could be another few weeks of selling," said Win Thin, senior currency strategist at Brown Brothers Harriman. Brown Brothers said the 99.25 would be a significant level and could point to another key level of 94.75.
Sinche said the spread between U.S. and foreign interest rates is narrowing, and that's a powerful driver for the dollar. "I think the dollar selloff ... is overdone, but I can't jump up and down and say it's time to buy the dollar yet," he said.