After being considered invincible in early 2020 due to inflation and US rate hikes, the US dollar is losing the confidence of analysts. The currency has fallen against all of its peers in the Bloomberg Dollar Spot Index over the past month.
The dollar looked invincible earlier this year when investors were betting on inflation and US rate hikes. Now they are strongly opposing it.
Former bulls including JP Morgan Asset Management and Morgan Stanley say the era of dollar strength is coming to an end as falling prices prompt markets to reduce bets on further tightening by the Federal Reserve. This could open up buying opportunities for currencies from Europe, Japan and emerging markets.
"Markets now have a better understanding of the Fed's trajectory," said Kerry Craig, a Melbourne-based strategist at JPMorgan Asset, which oversees $2.5 trillion. Currencies such as the euro and yen have room for recovery."
The debate over how to trade the world's reserve currency is heating up as more dovish comments from Fed officials and a slower pace of inflation rate hikes slow. Most have come to a similar conclusion: American exclusivity is declining.
A prolonged decline in the dollar has wider implications than just currency markets. It would ease the strain on European economies due to imported inflation, reduce the cost of food purchases for the poorest countries, and reduce debt repayment burdens for governments borrowing in US currency.
The Bloomberg Dollar Spot Index, which tracks the US currency against its 10 major peers, has fallen more than 6% from its September high. Additionally, the greenback has weakened against all its Group-of-10 counterparts over the past month, falling about 7% against the yen and the New Zealand dollar.
"US inflation is showing signs of softening and the central bank is mindful of the impact on price growth," said James Athey, investment director of rates management for ABRDN in London. At the same time, "we think the divergence has reached its limit," he said, referring to differences between monetary policy in the US and Japan.
The UK-based fund switched to a neutral position from an overweight dollar a month ago, and expects the greenback to weaken against the yen and pound.
Positioning data show asset managers made the most bets on the weakening US currency during the week from July 2021 to Nov. 18, according to the latest Commodity Futures Trading Commission data.
Latest Fed minutes back their thoughts. Most officials agreed that it would be appropriate to slow the pace of rate hikes soon. According to overnight index swaps, expectations for a peak in Fed rates in early November have fallen below 5%.
Treasury yields are also showing signs of peaking, with 10-year notes slipping nearly 70 basis points from their October highs.
still fast
While the dollar may no longer be an outright purchase, there are factors that could lead to episodes of US currency strength.
The Fed is laser-focused on making sure inflation is under control, according to Agnes Belash, a strategist at Barings in London, and that means keeping interest rates high for a while before cutting dollar assets. May have to
"The Fed's job is not done," said Belash, whose firm oversees $338 billion. "A long dollar position still makes sense."
dollar to flop
However, for a growing group of investors, exiting long dollar positions in 2023 is an important tradeoff. Among them is Eva Sun-wai, money manager M&G Investments, who is taking profits on long greenback bets favored by her Group-of-Four. and emerging market partners.
It's a good time to buy currencies "under extreme pressure," including the yen and the South Korean won, said Sonal Desai, chief investment officer for fixed income at San Mateo, California-based Franklin Templeton.
Morgan Stanley analysts led by Andrew Sheets predict the dollar will peak this quarter, and then decline through 2023, favoring emerging market assets. Paul Mackel, strategist at HSBC Holdings plc, said the US currency is likely to "flop" next year.
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