Will the dollar continue to fall? Hedge funds bet in the opposite direction
By Matthew Burgess and Garfield Reynolds*
Hedge funds are betting that the longest period of weekly dollar declines in nearly three years is about to be reversed after investors extended the pricing of Federal Reserve interest rate cuts to extreme levels.
Leveraged funds were net long – betting on the upside – in all major currencies against the dollar last week, the first time since January 2022, according to the latest Commodity Futures Trading Commission data.
While an indicator of overall investor positioning remains pessimistic about the dollar, the broad degree of optimism among hedge funds – equivalent to multimarket funds in Brazil – may signal an easing of concern about the impact of the banking crisis on the Fed’s willingness to fight inflation.
The bets paid off, and the Bloomberg Dollar Spot Index rose for the second consecutive day on Monday (17).
The rally was led by Fed member Christopher Waller, who said he favored further interest rate hikes to combat persistently high prices because of an unexpected rise in a gauge of consumer inflation expectations and better-than-expected US retail sales.
Traders will watch further data, including initial claims for unemployment insurance, this week as they look to assess the central bank’s monetary policy path.
Last Tuesday (11), traders were pricing in a possible Fed hike in May, followed by a move to cuts as early as July, according to data compiled by Bloomberg.
Markets now signal a slight chance of an interest rate cut in September and a larger one in November.
In all, markets suggest about 50 basis points in interest rate cuts by the end of the year, compared with expectations of about 65 basis points for much of last week. Rates are currently in the 4.75% to 5.00% range.
“Market pricing for interest rate cuts in November is too early for the FOMC due to the elevated pulse of underlying inflation in the US,” Joseph Capurso and Kristina Clifton, strategists at Commonwealth Bank of Australia, wrote in a note to clients.
They wrote that the dollar is likely to recover its losses in the coming months, even if it falls this week if US economic data disappoints.
The dollar recovered from a more than two-month low reached late last week when it ended a streak of five consecutive weekly losses, the longest since July 2020.
*With reporting by Aline Oyamada, David Watkins, Anya Andrianova, and Edward Bolingbroke
With information from Bloomberg
More: Brazil news in English, every day from The Rio Times.
This article was produced by The Rio Times’ automated newsroom system. How we use AI · Report an error · Editorial responsibility: Matthias Camenzind, Editor-in-Chief