(Bloomberg) — Hedge funds couldn’t have picked a worse time to turn bullish on the dollar.
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After betting against the greenback for 13 straight weeks, speculators flipped to a net long position in the week ended March 14, according to data from the Commodity Futures Trading Commission. The shift came days just before the Federal Reserve tempered its language around how much additional policy tightening might be needed, sending the dollar sliding.
“Many, including some hedge funds, have been caught out by the lack of the dollar safe-haven bid amid the US regional bank woes,” said Rodrigo Catril, a senior currency strategist at National Australia Bank Ltd. in Sydney. “Expectations of Fed easing are trumping other forces” and dampening the dollar’s outlook, he added.
Forecasting the dollar’s moves has become an increasingly tricky task as turmoil in the global banking sector complicates the Fed’s attempts to tame elevated price pressures. Treasury yields have whipsawed in recent sessions, highlighting the fast-changing bets on the US rate-hike outlook.
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The Bloomberg Dollar Spot Index tumbled as much as 0.9% Wednesday after the Fed tweaked its language around the outlook even as it signaled more tightening may follow its latest quarter-point hike. The gauge slipped 0.4% Thursday, with traders boosting bets on rate cuts for this year.
The greenback has lost ground against all but one of its Group-of-10 peers this week, and strategists expect the weakness to persist. T. Rowe Price sees the dollar declining as the rate gap between the Fed and some of its biggest peers shrinks, while Commonwealth Bank of Australia’s Carol Kong predicts support for the pound as UK inflation remains elevated.
The South Korean won led gains in Asia trading Thursday, advancing more than 2% against the dollar. New Zealand and Australia’s risk-sensitive currencies rose more than 0.6%.
“The Fed’s ‘dovish hike’ should clear the way for broad dollar weakness over the coming days and weeks, provided market turmoil and liquidity issues continue to subside,” Wells Fargo & Co. strategists including Mike Schumacher wrote in a note. “Support from relative real rates and economic performance is likely to wane over the coming period, particularly within a backdrop of credit tightening.”
Renewed Rout
But some strategists say the dollar may yet stage a comeback.
The greenback remains the preferred haven in times of stress as demonstrated by the rush to the world’s reserve currency at the height of pandemic fears in March 2020. The US currency also rose 0.9% last Wednesday as jitters surrounding Credit Suisse Group AG convulsed markets.
“A renewed rout in US banking stocks, especially to the extent that it impacts the flagship names, will likely keep risk conditions on a tentative footing which should continue to support the dollar on a tactical basis,” Simon Harvey, strategist at Monex Europe, wrote in a note.
Even so, a growing number of market participants believe that the dollar’s strength has probably peaked.
Despite the Fed’s rate hike on Wednesday, the US central bank’s rhetoric was noticeably more dovish compared to the European Central Bank and that should help the euro climb more than 5% to around $1.15 by year-end, according to ING Groep NV.
US “rate cuts in the second half 2023 remains our call,” ING strategists including Francesco Pesole wrote in a note. With risk sentiment improving as panic around the banking crisis eases, the dollar has been “left without a floor.”
–With assistance from Michael G. Wilson.
(Adds Asian currency moves in seventh paragraph)
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