By Ritvik Carvalho and Saikat Chatterjee
LONDON (Reuters) - The struggling dollar is on track to post its biggest monthly decline in nearly two years as investors ramp up bets that likely higher U.S. interest rates wouldn't support the greenback against the backdrop of a pickup in global growth.
While financial markets expect another three to four rate U.S. hikes in 2018, markets have turned their attention to other parts of the world where growth has picked up noticeably in recent months, particularly in Europe and Japan.
Another factor weighing on the greenback has been the steady unraveling of the so-called "Trump trade" - a bet that promised tax cuts, deregulation and fiscal measures will boost the economy - that has fizzled out since last year.
But are markets being too quick to price the dollar as the consensus short trade in currency markets for 2018? Here are nine charts that investors should watch.
DOWN, BUT NOT OUT
The dollar index is set for its biggest monthly drop since March 2016, and is hovering just above a three-year low of 88.438 hit after U.S. Treasury Secretary Steven Mnuchin endorsed a weaker dollar to help American exports last week. However, it is still up 13 percent over the past five years.
POSITIONING
Data from the U.S. Commodity Futures Trading Commission show speculators are decidely negative on the dollar's prospects, with a total of more than $11 billion in short positions taken out against the dollar versus the Group of 10 currencies. For dollar bears, that is food for thought as excessive positions mean there is a risk for a wider positions washout.
DIVERGING FORTUNES: BOND YIELDS VS. DOLLAR
Global bond yields have spiked higher in recent days, with the U.S. 10-year Treasury yield hitting a peak of 2.733 percent - its highest since April 2014 - on Tuesday. The rise has contributed to the dollar's decline. Investors should be carefully watching this as interest rate differentials are still a big driver of currencies and the dollar still leads the pack.
GLOBAL CURRENCY RESERVES
The dollar remains the world's dominant reserve currency for global central banks, with total allocated global FX reserves in dollars more than double of that in euros. Though reserve growth in euros for allocated reserves has outstripped that of the dollar in the past five out of the eight quarters, in times of risk aversion and selloff, the greenback is still a safe haven.
GLOBAL RESERVES RACE
The growth of dollars in central bank reserves has slowed noticeably in recent months as central banks have looked to diversify their holdings into other currencies such as euros or, in recent years, the Chinese yuan. But those holdings still remain small in comparison and far below recent highs. For example, the share of euros among global central banks reserves is still below a late 2009 peak of 28 percent.
DOLLAR VS. U.S. INTEREST RATES
The U.S. Federal Reserve has raised interest rates five times since it started unwinding its 2008 unconventional policies in December 2015, even as most other central banks have remained in crisis-era mode. But over that period, the dollar has declined more than 11 percent.
TIGHTENING CYCLES
Markets have tended to preempt interest rate hikes by the U.S. Federal Reserve, with the dollar gaining ahead of tightening cycles with protracted weakness seen in the middle and the end of the cycle. That has taken place in each of the past Fed tightening cycles except the ones that began in 1983 and 1999.
FINANCIAL CONDITIONS
The dollar's weakness has also played its part in keeping financial conditions loose in the U.S. despite the policy tightening. The weaker dollar has encouraged investors to borrow in the greenback and invest it in relatively higher yielding emerging markets.
VALUATIONS
On a real effective exchange rate basis, the dollar remains within one standard deviation of its median value. This suggests fair value, unlike the extreme overvaluation seen at the height of the early 2000s dot-com bubble and the lows hit during depths of the 2008 financial crisis.