The U.S. dollars sharp rally over the past month is unlikely to last, as analysts view it as driven largely by temporary factors notably the suspension of U.S. economic data releases due to the federal government shutdown and political turmoil in rival economies.

The greenback has risen about 3% against a basket of major currencies since mid-September, recovering part of its 11% loss earlier this year and moving away from its lowest level in more than three years.

Data from the U.S. Commodity Futures Trading Commission (CFTC) before publication was halted by the shutdown showed that net short bets against the dollar fell to $9.86 billion from a peak of $20.96 billion during the same period.

Options markets also reflected this shift in sentiment, with one-month and three-month euro-dollar contracts hitting their lowest levels in favor of the euro since mid-June.

Still, most analysts doubt the sustainability of the dollars rebound.

Mark Chandler, Chief Market Strategist at Bannockburn Global Forex, said: Over the three- to six-month horizon, I expect the dollar to weaken because the U.S. economy will slow and interest rates will decline.

Analysts say much of the dollars recent strength stems from investors covering short positions rather than building new long exposure.

Jayati Bhardwaj, FX strategist at TD Securities, said: What were seeing in the markets is simply position adjustment.

Joel Kruger, market strategist at LMAX Group in London, noted that the dollars rally has probably lost momentum despite its strength in recent weeks. Theres near-term downside risk for the dollar, he added.

As of 11:53 GMT, the U.S. Dollar Index was up 0.1% at 99.4 points, after trading between 99.07 and 99.4.

International Developments Offer Temporary Support

The dollars weakness earlier this year stemmed from fading U.S. exceptionalism, fears that President Donald Trumps protectionist trade policies would hurt growth, and concerns over Americas widening fiscal and trade deficits.

But with U.S. data releases suspended and new political crises emerging abroad notably in Japan and France investors have shifted their focus away from the dollars own vulnerabilities.

The euro fell about 1.3% in October, ending a two-month winning streak, while the yen weakened roughly 3% against the rising dollar.

Political instability in France the eurozones second-largest economy weighed on the euro, while leadership changes in Japan clouded expectations for the Bank of Japans monetary stance, pressuring the yen further.

Even so, analysts argue that investors reactions have been exaggerated.

Morgan Stanley strategists wrote on Friday: The surprise result of Japans Liberal Democratic Party leadership election triggered an outsized yen sell-off as investors bet on fiscal expansion and looser monetary policy. We see this as an overextended positioning move.

A Counter-Trend Rally

A Reuters poll in early October showed most FX strategists expect the dollar to weaken against all major currencies over the next three, six, and twelve months, citing the growing U.S. fiscal deficit and concerns about Federal Reserve independence.

Colin Graham, Head of Multi-Asset Strategies at Robeco in London, said: The dollar will decline over time, but there are always counter-trend rebounds within a broader downtrend. Were positioned short the dollar but managing our exposure dynamically.

Could the End of the Government Shutdown Spark Another Move?

Analysts say the dollar could extend its rally if U.S. growth data surprises to the upside and the Fed refrains from cutting rates as expected.

For now, however, the same bearish fundamentals that pushed the dollar lower earlier this year remain including concerns over slowing growth and monetary-policy uncertainty though recent political events have overshadowed them temporarily.

Morgan Stanley strategists added that once U.S. data releases resume after the government reopens, they could serve as a catalyst for a yen rebound, advising investors to stay short on the dollar versus the yen.

With Fed Chair Jerome Powell entering the final months of his term and amid ongoing White House efforts to remove Fed Governor Lisa Cook analysts say concerns about Fed independence and confidence in the dollar will grow more prominent.

BofA Global Research wrote in a Friday note: Investors remain uneasy about the Feds independence and its implications for the dollar, though their focus has temporarily shifted elsewhere.

At the same time, the Feds expected resumption of its rate-cutting cycle will lower hedging costs for foreign investors, adding further pressure on the greenback.

Chandler of Bannockburn Forex concluded: I believe the dollars major bull cycle has ended were now in its downward phase.