The Federal Reserve is widely expected to raise interest rates at the end of its policy meeting on Wednesday, but the dollar's recent performance doesn't obviously reflect that expectation.
The dollar index, which tracks the U.S. currency against six peers, is down more than 2 percent for 2018, and that bucks the truism of a strong greenback accompanying a rate-hiking Fed. That common wisdom might not be sufficiently nuanced, however, according to Ray Farris, head of fixed income research and economics for Asia Pacific at Credit Suisse.
"When you say that rate hikes help the dollar, that's true, but really only at certain points of the Fed rate hike cycle," Farris told CNBC at the Credit Suisse Asian Investment Conference in Hong Kong.
On the one hand, higher interest rates theoretically attract investors looking for greater yield, consequently increasing demand in a currency. But, on the other hand, it has been "a regularity since the end of Bretton Woods that the early stages of Fed rate hikes have actually seen the dollar weaken for a period of time," Farris said.
There are other factors at play too, with investor concerns over trade tensions stemming from recent U.S. steel and aluminum tariffs. While interest rate hikes should support the U.S. currency, the potential implications of trade protectionism could be negative for the greenback.
"So until U.S. yields are a lot higher, we think the dollar can continue to weaken," he said.
On Tuesday, the dollar was mostly steady against a basket of currencies as the pound and euro extended overnight gains on Brexit-related developments and a Reuters report that the European Central Bank was moving to discussing its interest rate path.
Others have also pointed to political developments in Washington as another reason contributing to recent moves in the U.S. currency.
The flurry of personnel changes in recent weeks have included the firing of Rex Tillerson and the resignation of Gary Cohn from his role as the White House's chief economic advisor.
"A number of other high profile exits are expected in the coming weeks and unfortunately, political uncertainty is overshadowing Fed policy," Kathy Lien, managing director of foreign exchange strategy for BK Management, said in a note entitled "Why the Dollar is Falling Despite Upcoming Fed Hike."