(Bloomberg) — Hedge funds are growing ever more bearish on the dollar, underscoring speculation the Federal Reserve will slow the pace of its interest-rate hikes.Most Read from BloombergBets against the greenback swelled to 30,457 contracts last week, the most since August 2021, according to data from the Commodity Futures Trading Commission on eight currency pairs. Swap contracts show investors now expect the Fed funds effective rate to peak below 5%, down from 5.06% after data on Friday showed US wage growth cooled last month.“Pillars of dollar strength are starting to recede,” said John Bromhead, a strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “Last week’s minutes show the Fed is approaching terminal rate and will be pausing soon.”The dollar’s fortunes have wilted in recent months as funds from Jupiter Asset Management to JPMorgan Asset Management bet the Fed will rein in the pace of rate increases. Last year, the central bank’s aggressive hiking stance relative to other nations and haven flows helped fuel the dollar gauge to a record high.That could be starting to shift with traders betting the ECB will hike further than the Fed in 2023, with around 150 basis points and 60 basis points of additional tightening priced respectively, according to swaps linked to meeting dates. Bank strategists at Nomura International Plc and Morgan Stanley are recommending long euro positions against the dollar.“I think we’re in for a big divergence in monetary policy between the US and Europe in 2023,” said Union Investment’s head of fixed income Christian Kopf in an interview with Bloomberg Television, who sees the Fed reaching the peak in its hiking cycle in February. “That should drive the euro higher.”Story continuesUS inflation data for December and remarks from Fed Chair Jerome Powell this week may help set the tone for the dollar’s next move. The Bloomberg Dollar Spot Index fell 0.4% Monday, after sliding 1% Friday following weaker-than-expected wages and services data.Read More: Traders Slash Fed Bets After Data; Key Yield Inversion DeepensStill, some strategists say the greenback may soon resume its upward momentum as the US central bank vows to keep tightening.“We still lean with the Fed in thinking that inflation is still to be defeated and that policy rates won’t start to fall this year,” wrote Standard Bank’s head of Group-of-10 strategy, Steven Barrow in a note to clients. “There is more churning to do in asset prices before stronger uptrends for bonds, stocks and currencies.”Commodity currencies stood out among Group-of-10 currencies on Monday, led by the Norwegian krone. The euro gained 0.4% to $1.0685 as of 11:59 a.m. in London.While the US dollar may still enjoy some bouts of strength, “currencies in emerging market Asia are likely to be beneficiaries from their links to stronger Chinese growth,” Goldman Sachs Group Inc. strategists including Kamakshya Trivedi wrote in a note. “Our new forecasts suggest that the dollar has peaked.”–With assistance from Libby Cherry.(Updates with context, quotes from fourth paragraph.)Most Read from Bloomberg Businessweek©2023 Bloomberg L.P.