The dollar is biding its time and should resume its climb once the euphoria over a possible Greek debt deal dies down and focus returns to higher U.S. interest rates, strategists say.
The euro has been doing better against the dollar but it basically moved sideways since late last week, even with the optimism over a possible deal with Greek creditors that has driven European equity markets sharply higher. The euro was trading slightly higher Monday at about $1.13.
"Our sense is FX markets are just waiting for Greece to be resolved so they can go back to watching the fundamentals they prefer to watch—what happens with the Fed outlook ... rather than trying to second guess Greek political headlines, which is difficult for FX," said Vassili Serebriakov, strategist at BNP Paribas.
Greece offered concessions on its reform package that changed the tone of negotiations with the euro zone and IMF in the last day. However, no final deal has been reached though there is optimism an agreement will come before Greece's debt payments are due.
The dollar index peaked this year at just over 100 in March and was trading back at 94.16 on Monday. The dollar is still up about 20 percent against the euro since last summer, and the euro has been trading between $1.10 and $1.14 since early June after hitting a low of $1.05 in March.
While strategists say the dollar should resume its move higher soon, the buzz in the market was about an unusually large repositioning in the euro and yen against the dollar last week.
"The dollar long position in aggregate against all major currencies dropped by more than $10 billion last week, which was about a quarter of the total we had in early June. It may be a seasonal issue here in a sense that we're getting closer to summer kind of markets, where people don't want to have risk on," said Shaun Osborne, head of global foreign exchange strategy at TD Securities. "There's a general uncertainty about the economy and what the Fed is going to have to to do, and there's been this endless saga with regard to Greece."
Osborne said he expects the dollar to move sideways to lower temporarily before regaining its footing, and he sees the euro hitting parity with the dollar by the end of the year.
The Commodities Futures Trading Commission's commitment of traders report for the week ending last Tuesday showed the largest fall in bullish bets on the dollar in two years. Osborne noted that positioning in the euro accounted for most of the change.
"I think it was people taking back euro short positions and reducing dollar long positions. I don't think it was any massive vote of confidence. ... I don't think people are running back to the euro because we had major progress in Greece," he said.
Osborne said some of the dollar repositioning may have been the result of its recent weakness with some traders lightening up rather than placing big new bets on a falling dollar. "I don't think the euro has legs. I don't think there's enough good news to push the euro up," he said.
Brown Brothers Harriman chief currency strategist Marc Chandler said yen longs increased by 50 percent, and euro longs added 30,000 contracts to 82,700.
"Are these longs for real, or are they in weak hands?" asked Chandler, who estimates that the positions were added at an average $112.76 per euro, the middle of the recent trading range.
"It could be they were doing this ahead of the FOMC meeting, expecting a dovish FOMC meeting," said Chandler, adding the Fed's own forecasts are for possibly two rate hikes this year.
Chandler expects improvements in U.S. data to lift the dollar, and he expects it to resume its uptrend. Monday's existing home sales were at a more than five-year high, and the market is looking forward to durable goods Tuesday, revised first quarter GDP Wednesday, and personal income and spending Thursday.
"I think this week we'll get more data that shows the U.S. economy accelerating," said Chandler.