Analysts are losing faith in the US dollar, which was thought to be unstoppable in early 2020 due to inflation and US rate hikes. In the Bloomberg Dollar Spot Index, the currency has fallen against all of its peers over the last month.

Earlier this year, when investors were increasing their bets on inflation and US rate hikes, the dollar appeared unstoppable. They are now turning against it in droves.

Former bulls such as JPMorgan Asset Management and Morgan Stanley believe the era of dollar strength is coming to an end as markets reduce their bets on further Federal Reserve tightening. This could mean buying opportunities for European, Japanese, and emerging market currencies.

“Markets now have a better grasp of the Fed’s trajectory,” said Kerry Craig, a strategist in Melbourne at JPMorgan Asset, which oversees $2.5 trillion. “The dollar is no longer the straight, one-way buy we’ve seen this year. There’s room for currencies like the euro and yen to recover.”

“US inflation is showing signs of moderating and the central bank is conscious of the lagged effect rate hikes would have on price growth,” said James Athey, investment director of rates management for abrdn in London. At the same time, “we think that divergence has reached its limit,” he said, referring to the difference between monetary policy in the US and Japan.

The debate over how to trade the world’s reserve currency is heating up, as more dovish comments from Fed officials and slower inflation fuel bets on a slower pace of rate hikes. Most have come to the same conclusion: US exceptionalism is fading.

A longer-term decline in the dollar has ramifications beyond currency markets. It will relieve stress on European economies caused by imported inflation, lower food prices for the poorest countries, and reduce debt repayment burdens for governments borrowing in US currency.

The Bloomberg Dollar Spot Index, which compares the US currency to ten of its major peers, has fallen more than 6% since its peak in September.

The UK-based fund switched from an overweight to a dollar-neutral position about a month ago, and it expects the greenback to fall against the yen and pound.

According to the most recent Commodity Futures Trading Commission data, asset managers increased their bets on a weaker US currency by the most since July 2021 during the week ending November 18.

The most recent Fed minutes support their point of view. Most officials agreed that the pace of rate increases should be slowed soon. According to overnight index swaps, expectations for the peak in Fed rates have fallen to below 5% from above that in early November.

Treasury yields appear to have peaked as well, with 10-year notes falling around 70 basis points.

While the dollar is no longer a sure bet, there are still factors that could lead to periods of US currency strength.

According to Agnes Belaisch, a strategist at Barings in London, the Fed remains laser-focused on keeping inflation under control, which means interest rates may have to remain elevated for a while before it starts cutting, supporting dollar assets.

However, for a growing group of investors, reducing long dollar positions is a critical trade into 2023. Eva Sun-wai, a money manager at M&G Investments, is one of them, having profited on long dollar bets in favor of its Group-of-Four and emerging-market peers.