The Federal Reserve’s recent “great pivot” has triggered a surge in bearish bets against the US dollar, with speculative traders leading the charge. Non-commercial traders, including hedge funds and asset managers, have ramped up their short positions, indicating a growing anticipation of the greenback’s decline.
Key Takeaways:
- Short bets surge: The number of contracts tied to expectations of a falling dollar jumped over 10,000 in a single week, reaching 39,000 contracts.
- Fed pivot fuels decline: The Fed’s revised economic projections hinting at future rate cuts sent the Bloomberg Dollar Spot Index tumbling, marking its worst year since 2020.
- Muted inflation data confirms shift: Friday’s data showing subdued price pressures further cemented the Fed’s dovish stance, bolstering the case for shorting the dollar.
Beyond the Numbers:
- Swiss franc soars: The Swiss franc reached its highest level against the dollar since 2015, benefiting from safe-haven demand.
- Euro and krone climb: The euro and Norwegian krone also gained, reaching their highest levels since August.
- Options market points lower: One-year risk reversals, a gauge of investor sentiment, tilted towards dollar weakness, suggesting further declines in the coming year.
Leveraged Funds and Asset Managers:
- Leveraged funds: Reduced their net short position in the Japanese yen (JPY) while increasing net short positions in the euro (EUR) and raising net long positions in the British pound (GBP). They also shifted their positions in other major currencies, including the Australian dollar (AUD), New Zealand dollar (NZD), Canadian dollar (CAD), and Swiss franc (CHF).
- Asset managers: Switched their JPY position from net short to net long and increased their net short position in GBP. They also trimmed their net short positions in AUD and NZD and reduced their net short position in CAD.
Conclusion:
The Federal Reserve’s dovish pivot has unleashed a wave of short bets against the dollar, with speculators betting on its continued decline. This trend, coupled with muted inflation data and a shift in investor sentiment, suggests that the greenback’s reign as the dominant currency may be facing some serious challenges in the near future.
