The Fed has become the dollar's 'biggest problem'

The US dollar has a problem.

It's the worst-performing G10 currency of this year, and has fallen about 8% against its major peers. As strategists identify catalysts that could send it higher, the Federal Reserve is unlikely to be on that list.

"The USD's biggest problem, is it can't expect help from the Fed for a long time, and that won't change following the July FOMC meeting," said Alan Ruskin, a macro strategist at Deutsche Bank, in a note on Wednesday.

"The most USD negative feature right now is simply how difficult it is to tell a USD positive story while there is a hiatus of another 5 months (and possibly longer) before Fed rate hikes resume," Ruskin said.

On Wednesday, the Fed concludes its two-day policy meeting, and Bloomberg's World Interest Rate Probability data shows a 0% chance the Fed hikes rates. The market's focus would be on any more news about when the Fed plans to start shrinking its $4.5 trillion balance sheet, and how the statement acknowledges further declines in inflation.

Although the Fed began raising interest rates before many other G10 peers, it's expected to continue paying close attention to how inflation is evolving before continuing to raise rates. This caution has put some downward pressure on the dollar.

"The USD needs either some increased probability of a fiscal stimulus; or a risk-off event like fixed income treating a Fed balance sheet tapering as a tightening," Ruskin said.

With the Fed working to shrink its balance sheet, the momentum for the dollar through the summer rests on technical signals, Ruskin added.

Traders' bets per the Commodity Futures Trading Commission that the dollar would fall rose to the highest level since February 2013 last week, according to Deutsche Bank. This should limit how far below major technical support levels the dollar is allowed to decline, Ruskin said.