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This crowded trade may be about to reverse: 'Too many people on one side of the boat'

VIDEO1:1501:15
A dollar comeback may rattle the market: Equity strategist

The U.S. dollar continued its slide on Thursday against a basket of foreign currencies, trading near 15-month lows after U.S. services sector data missed economists' expectations early in the session.

Currency markets are of particular concern right now to Matt Maley, equity strategist at Miller Tabak, who said in an interview Thursday that he is watching the dollar/euro relationship quite closely.

The euro is the top-weighted currency in the dollar index, and the activity in both currencies has widespread impact on equity and commodity markets.

"We have seen a big move in both the dollar and the euro. We are coming to a point here where the euro has become very over-owned and very over-loved, and the dollar has become very under-owned and very over-hated," Maley said Thursday on CNBC's "Trading Nation. "

The currency, which has declined over 9 percent year to date, has weakened relative to foreign currencies as the likelihood of future interest-rate hikes from the Federal Reserve has fallen, along with the chances of pro-growth policies passing in Washington. Maley pointed to the Daily Sentiment Index, which measures futures traders' sentiment, flashing very bearish sentiment toward the dollar.

Maley also says a reversal in the dollar would cause stock market volatility (measures of which are near record lows) to pick up substantially.

"We have too many people on one side of the boat," he said. "That is the exact opposite of what we had at the beginning of the year, just before the dollar fell out of bed. I think the risks are that we see a multi-week and even a multi-month rally in the dollar. If that takes place, that is going to cause a pickup of volatility in certain markets."

The weaker U.S. dollar has proven beneficial for emerging markets-related equities, such as the EEM exchange-traded fund, which has gained 25 percent year to date. If the dollar sees a reversal and bounces, Maley said, "it could have an impact not only on emerging markets but on our markets, as well."