Tuesday, September 26, 2023

Bets against the dollar rise despite the rebound

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Speculative bets against the dollar hit their highest level in nearly three years, as bears cling to their opinion on the currency despite its rebound of nearly 1% this year.

A strong run in the global reserve currency against its peers pushed the euro close to $ 1.20 from its high above $ 1.23 earlier this month.

But speculative investors such as hedge funds amassed more than $ 10 billion in bets against the dollar in the week ending January 12 – the most since March 2018 – according to the latest data available from US Commodity Futures Trading. Commission.

In a larger group of investors, including asset managers, cumulative negative bets on the dollar are at their highest level in a decade.

“The speculative community is very short at the moment, but there is a good reason: because the fundamentals still point to a weaker dollar in the medium term,” said Vasileios Gkionakis, head of currency strategy at Lombard Odier.

The dollar lost nearly 7% last year as interest rate cuts reduced the attractiveness of dollar assets. Many investors are sticking to their view that looser monetary policy in the United States relative to rival economies like China means the January rebound will not last.

The consensus view for a weaker dollar was tested earlier this month by the Democratic Party’s victories in Georgia’s main Senate second-round election, prompting analysts to rate a larger fiscal stimulus. This resulted in a selloff of US government bonds, reducing their yields to more attractive levels and lifting the dollar.

The detachment between hedge fund betting and the currency’s trajectory has raised fears that any action by speculative investors to unwind their trades could trigger an instant upward correction.

But Adarsh ​​Sinha, a Hong Kong-based currency strategist at Bank of America, played down concerns about positioning.

“Short positions in the dollar are indeed close to the levels that have generally preceded rallies over the past decade,” Sinha said. But looking back over a longer period, like the dollar’s downtrend in the 2000s, there have been “long stretches” where bets against the dollar were even more popular than they are. now, he added.

Lombard Odier’s Mr Gkionakis said the bleak outlook is likely to turn out to be fair as the post-crisis rebound in the global economy could turn out to be stronger than expected, he believes, prompting investors to abandon security of the dollar.

Mr. Gkionakis expects the euro to trade at $ 1.27 by the end of the first six months of the year. “I think the speculative community is right to be short of dollars,” he added.


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