ORLANDO, Florida, Jan 15 (Reuters) – The U.S. dollar is
off to a strong start this year but no thanks to hedge funds and
foreign exchange speculators, who have extended their bets
against the world’s reserve currency to levels last seen in
August.
The latest Commodity Futures Trading Commission data show
that funds increased their net short dollar position against a
range of major and emerging currencies to $12.7 billion in the
week ending Jan. 9 from $10.5 billion the week before.
That’s the largest net short position since the week ending
Aug. 22, and marks a swing of more than $22 billion from the $10
billion net long in mid-November. That was the largest aggregate
bullish dollar bet in over a year.
Funds have now cranked up their bearish bets against the
dollar in six of the last seven weeks, which dovetails with
interest rate and money markets that continue to price in more
than 150 basis points of rate cuts from the Federal Reserve this
year.
Short-term interest rate spreads have moved against the
dollar quite significantly in recent weeks. The two-year
U.S.-German spread, for example, has shrunk around 25 basis
points this year to its narrowest since August.
Yet so far this year the dollar has rallied against nearly
every major currency, most notably a 3% jump against the
Japanese yen. It is something of a puzzle.
As HSBC currency analysts note, the CFTC positioning data
contradicts the message from strong U.S. growth figures relative
to other major economies, and a hawkish Fed relative to the
market.
“The former still paints the impression of U.S.
exceptionalism and the latter’s messaging is not as dovish in
tone compared with the market pricing,” they wrote on Sunday.
FIGHTING THE FED
It is indeed curious that currency speculators are leaning
so heavily against the dollar and rates traders are betting on
150 bps of rate cuts this year – double what the Fed itself
indicated in its December Summary of Economic Projections.
While economic activity is likely to slow, many economists
are abandoning their 2024 recession calls in favor of some
degree of ‘soft landing’, the labor market is still creating
jobs, and corporate earnings growth is tracking over 10%.
Compare with the euro zone that is either in or flirting
with recession, expected UK GDP growth this year of less than 1%
– the weakest of all G7 nations, according to the IMF – and a
potentially less hawkish outlook for the Bank of Japan.
The upshot is the 2024 path for the other G4 central banks
could be more dovish than markets had envisaged only a few weeks
ago. All else equal, this should weigh on their respective
currencies.
As 2024 gets underway, the FX market at large appears to be
leaning in this direction. Hedge funds are leaning the other
way, and digging in.
The opinions expressed here are those of the author, a
columnist for Reuters.
(By Jamie McGeever; Editing by Christopher Cushing)
