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The US dollar could stay stuck in a rut until after November

U.S. dollar
Stephen Hilger | Bloomberg | Getty Images

The U.S. dollar is stuck in a rut, and it could stay there for a while.

Dollar bulls have been falling by the wayside this summer, as the U.S. Federal Reserve looks further away from tightening its monetary policy. The currency also runs the risk of being dumped around the presidential election if Republican Donald Trump reverses his current trend of losing ground in the polls, or if either he or Democrat Hillary Clinton ramps up anti-trade commentary.

The greenback's next hurrah could come when Fed Chair Janet Yellen speaks in Jackson Hole, Wyoming, on Aug. 26, but it may be a brief one.

"I don't expect hard signals on rates from Janet Yellen, because the data is so uncertain." -Alan Ruskin, head of G-10 currency strategy, Deutsche Bank

While Yellen should continue to emphasize that the Fed wants to raise interest rates, she's not expected to sound hawkish enough to spark much of a rally in the dollar. Strategists don't expect her to put the central bank's September or even November meetings in play with her comments.

"I don't expect hard signals on rates from Janet Yellen, because the data is so uncertain," said Alan Ruskin, head of G-10 currency strategy at Deutsche Bank. He pointed to Yellen's speech at Harvard University in May where she sounded ready to pull the trigger on rates, with her comment that it would be appropriate to raise rates in "coming months" if the economy holds up.

But the Brexit referendum and squishy data have held back the Fed. The data are also confusing with super-strong payroll data, and then last week's flat July retail sales. "She doesn't want to get caught up twice. I think the data does the speaking," Ruskin said.

He said he believes the market should be giving higher odds to a rate hike, now about 50-50 for December. He also expects the dollar to strengthen against the euro by year-end, with the common currency at 1.05 to the dollar. It was at 1.11 Monday.

There are positives from a weaker dollar. It's good for U.S. corporations that make profits overseas, positive for commodities prices and for U.S. exports. A strong dollar, on the other hand, could be problematic in that if it strengthens too much and too fast, it could hurt U.S. exports and stall out emerging market economies, particularly those that rely on commodities.

"For now, the bias in the dollar is buy EM (emerging markets), sell the dollar. It seems to be one of those trends the market is latching onto," said Win Thin, senior currency strategist at Brown Brothers Harriman.

The dollar index was trading around 95.61 on Monday. Brown Brothers said a drop below 95 would be bearish, signaling a break to 94.50 and the potential of 94 for the index.

Thin said Yellen is unlikely to say anything that could change the market's view on rate hikes for September or November, and at best, she could increase the market view that December may be the time for an interest rate hike.

For now, the dollar is not reacting to the election, but if there's any change in the odds for Trump, the greenback could react to his negative comments on trade and uncertainty surrounding his policy. Trump last week told CNBC he is not anti-free trade.

"A strong dollar was necessary for globalization to expand, but when/if there is a retrenchment from globalization by U.S. politicians, there's no incentive to keep the dollar strong since owners of capital can't freely move their capital across borders anyway." -David Zervos, chief market strategist, Jefferies, in a note

"If Trump comes in, it's dollar negative, no matter what, in my opinion," said Thin. He added that Clinton would be "steady as she goes," more like the status quo.

"If his possibilities rise, I think that will be seen as introducing new areas of uncertainty, whereas Clinton will be viewed by the market place as something where policy is largely continuous, in terms of what we've seen in the Obama administration," said Ruskin.

David Zervos, chief market strategist at Jefferies, wrote in a note that the dollar could be influenced over the long term by populism, not just surrounding Trump.

"A strong dollar was necessary for globalization to expand, but when/if there is a retrenchment from globalization by U.S. politicians, there's no incentive to keep the dollar strong since owners of capital can't freely move their capital across borders anyway," he wrote in a note. He said a move away from globalization would hit the dollar, just as the U.K.'s vote to leave the European Union hurt the pound.

Zervos said for that reason he likes a short U.S. dollar against Latin American currencies — Peru, Argentina, Colombia and Brazil.

"The market is just not excited about anything going on," said Boris Schlossberg of BK Asset Management. "The belief is even if the Fed wanted to do something, the rest of the world is moving the other way. They don't really want to tip the scales in terms of tightening. I don't think they think the global economy is strong enough to take a hit."

Schlossberg said the easing in Europe, Japan and elsewhere could stymie the Fed. "The euro is kind of range bound, and the yen is a huge problem for everything because it continues to strengthen. The Japanese have run out of ideas and options," he said.

He said the yen looks set to continue rising. Dollar/yen was at 101.20. "The market is obviously gunning for 100. The Japanese themselves have said they cannot have the yen at 100. That creates deflation they can't combat. Short of intervention at this point, their options are limited," he said.

The U.S. presidential election is not driving the currency market in his view, but the actions of politicians could change post-election, and that could be a positive.

"It's monetary policymakers that are driving the dollar. I think there's a very slow but discernible shift by fiscal policymakers to finally take control of the economy. This whole idea of austerity is dying a slow death," said Schlossberg.

Both Trump and Clinton are pushing plans that would immediately boost infrastructure spending. Japan too recently announced a big fiscal stimulus plan.

"I think if this election is bringing anything to the forefront, it's the idea that it's time for fiscal officials to take control of the economy," Schlossberg said.