Think the dollar is about to peak? Wall Street pros explain how to trade it

Published Wed, Nov 9 20228:32 PM ESTUpdated Thu, Nov 10 20226:25 AM EST

Dollar strength has been the talk of the currency trading world for most of the year. The U.S. dollar index , which measures the dollar's value relative to a basket of world currencies, rose to a two-decade high in September. It's also hit all-time highs against several major currencies in recent weeks, including the British pound . Several market participants now believe the dollar rally, driven by the Federal Reserve raising interest rates more aggressively than other central banks, could fade over the next three to six months. Analysts expect the dollar to decline against 18 out of 38 currencies in the fourth quarter of this year, according to FactSet data. Moreover, they forecast the decline will widen to 10 other currencies for the second quarter of next year. CNBC Pro canvassed opinions from four investment banks and brokers on where they see the dollar heading. UBS UBS considers selling the dollar against G-10 currencies being a "top investment idea for 2023." The Swiss bank said that it will be less about investment choices and more about portfolio rebalancing that's likely to cause a sell-off in the dollar. According to the investment bank, years of negative interest rates have led to a sizeable un-hedged buildup of dollars worldwide. For example, the largest Japanese pension fund holds more than $500 billion of dollar assets, with only a small portion hedged, it said. With the dollar index rising to its highest level since 2001, UBS says such investors will begin selling dollars to reduce their risk of future losses. The bank suggests traders can look at USD worst-of put options, derivative contracts that go up in value when the dollar declines, against a basket of currencies such as EUR , JPY and GBP . ING The Dutch multinational bank thinks that while the dollar will strengthen in the near term, the Federal Reserve will likely sound the "all clear" on further rate hikes around March next year. But the Fed pivot alone might not be sufficient for the decline in the dollar, says Chris Turner, global head of markets at ING. "You do need the pull factor of some growth in the Eurozone or China to pull money out of what may be a 5% yielding dollar by that time 2Q23," he said. Turner does warn that the decline in the dollar might be delayed if inflation proves to be "stickier" than expected and pushes the Fed to raise rates higher. He says when the time is right, and it isn't now, traders could look at "put spreads, which would not be subject to the time decay." BCA Research Analysts at BCA Research say from a technical standpoint, the dollar is due for a reversal. Echoing UBS's view, BCA Research also suggests "long-term investors should begin to sell the dollar on strength." The Montreal-based investment research group also said several catalysts could add downward pressure on the dollar, including central banks catching up with the Fed with rate hikes or an uptick in Chinese economic activity , among others. "In our view, we are only halfway through this checklist but nonetheless, conditions are falling into place for a bearish U.S. dollar stance," said Chester Ntonifor, foreign exchange strategist at BCA Research, in a note to clients. Goldman Sachs The Wall Street bank remains bullish on the dollar over the next three months and sees certain G-10 currencies only recovering beyond the six-month horizon. However, Goldman favors the Brazilian real , among certain other currencies, over the short term against the dollar following the election of Luiz Inacio Lula da Silva . "Brazil stands out clearly with sustained decreases in inflation, rising real rates, and an FX-supportive macroeconomic backdrop that should continue to drive foreign inflows into Brazilian assets among investors with a global mandate," said the team led by Kamakshya Trivedi, head of global FX, rates and EM strategy at Goldman Sachs.