Dollar Rally May Stumble on ECB Rate Hikes

The US dollar's recent rally may have reached its peak as other central banks, including the European Central Bank (ECB), begin to tighten monetary policy. The ECB's rate hikes are putting a brake on the greenback's advance.

JPMorgan estimates that the US dollar was undervalued by 2-4% before the Fed's latest interest rate decision. However, this could lead to 'catch-up trading', where speculators switch from shorting the dollar to buying it, continuing the USD index rally.

The narrowing of yield spreads between long-term and short-term Treasury bonds is also supporting the dollar. Historically, a narrowing spread has been bullish for the DXY.