As Fed wakes sleepy dollar, shaken bears could bolster gains – Opinion
A hawkish move by the Federal Reserve woke a sleepy dollar, sending the US dollar to its highest level in months and stoking expectations that an unwinding of bearish positions could fuel more gains.
The dollar was on track for its biggest two-day percentage increase against a basket of major currencies in 15 months on Thursday and sits at its highest level since mid-April, a day after the central bank moved its first scheduled rate hike in 2023 in the face of soaring inflation.
Betting against the dollar has been a popular trade for months, as the Fed’s insistence on maintaining its ultra-dovish stance despite rising inflation drove the currency to a nearly 3-year low over early this year.
The slightly hawkish change in Wednesday’s statement appears to change that calculation: The prospect of an earlier-than-expected rise in U.S. rates makes the dollar more attractive to investors looking for yield against currencies such as the euro and the yen. Goldman Sachs and Deutsche Bank, for example, after the Fed meeting recommended investors reduce their bets on the euro’s rise against the dollar.
“I think the currency markets have finally caught on to the idea of earlier normalization on the part of the Fed,” said Simon Harvey, senior currency analyst at Monex Europe.
Large bets against the US currency could accelerate the recent move if the threat of further gains causes investors to reverse their bearish positions. Net bets against the dollar in futures markets stood at nearly $ 18 billion last week, a three-month high, according to CFTC data.
“In the weeks and months to come, the short dollar thesis that has been so dominant and popular for much of the past year will be severely tested,” said Stephen Jen, portfolio manager of the fund. speculative Eurizon SLJ.
Momtchil Pojarliev, head of currencies at BNP Asset Management in New York, bought the dollar against the Japanese yen after the Fed meeting. “The Fed has been patient, but we all know it’s going to (become hawkish) at some point,” he said. “I didn’t think it would be now.”
Due to the dollar’s central position in the global financial system, its fluctuations tend to affect a wide range of assets.
A stronger dollar tends to weigh on the balance sheets of US multinationals, making them less favorable to converting their foreign earnings into their national currency.
A rising greenback could also help contain a surge in commodity prices that has helped boost inflation this year, as many commodities are valued in dollars and become less affordable to foreign investors when the dollar s ‘appreciate.
“With our view of rising rates, risky assets and stocks will struggle,” said Kaspar Hense, portfolio manager at Bluebay Asset Management, which oversees $ 60 billion. Hense sold the euro short after Wednesday’s Fed meeting.
However, some market participants maintain their bearish views on the dollar, noting that the Fed’s easy money policies, which include buying $ 120 billion a month in treasury bills, remain in effect. Other central banks should follow the Fed’s lead by slowly normalizing monetary policy, potentially narrowing the rate differential between the United States and other economies.
Goldman Sachs believes a global recovery will weaken the dollar in the long run, while a report released Thursday by Societe Generale showed a year-end price target of $ 1.27 for the euro, from $ 1.19 Thursday.
“Obviously, the bearish history of the dollar has suffered technical and fundamental damage, but I would like to see how the dust settles before determining if the story of the falling dollar is behind us,” Paresh Upadhyaya said, director of foreign exchange strategy and portfolio manager for Amundi. Pioneer in asset management.
“Now that will largely depend on the response from other central banks in the G10 and emerging markets. “
Upadhyaya reduced its short position on the dollar ahead of the Fed meeting, but believes the currency will eventually fall. Harvey, of Monex Europe, wants to see if the data for the next few weeks will strengthen the case for a stronger-than-expected recovery.
Others, however, believe there might be room for more dollar payoff.
Short-selling the dollar “has been a popular operation for discretionary and systematic managers,” said David Gorton, chief investment officer of hedge fund DG Partners. The Fed’s “hawkish surprise may have revealed how extended some of these short positions are.” —Reuters