Unlock Editor’s Digest for free
FT editor Roula Khalaf selects her favorite stories in this weekly newsletter.
Hedge funds have unwound their bets against the dollar after the unexpected resilience of the US economy sparked a rally in the dollar in the first six weeks of the year.
Citibank, one of the world’s largest currency trading banks, said hedge funds had switched from positioning for a decline to betting on the dollar’s appreciation.
The funds have “closed all of their short exposure to the U.S. dollar in aggregate,” and their long positions now equal more than 80 percent of their peak exposure over the past year, according to Citi. Late last year, they had minor negative bets as investors prepared for a quick series of interest rate cuts by the Federal Reserve.
“The consensus view that the dollar would weaken at the start of the year was wrong and people have changed their positions,” said Sam Hewson, head of foreign exchange sales at Citi, adding that many hedge funds had been forced to cover their positions. short positions such as “the first Playbook 2024 was adjusted”.
The dollar is up nearly 3 percent so far this year, boosted by strong economic data, including blockbuster jobs numbers last week that dashed hopes of a sharp drop in borrowing costs in the biggest economy. biggest in the world.
Federal Reserve officials have also been rejecting a series of rate cuts priced in by markets this year. On CBS 60 minutes, issued on Sunday, Federal Reserve Chairman Jay Powell said he expected rate cuts of about three-quarters of a point this year. Markets are pricing in four or five rate cuts, down from six or seven at the end of last year.
Currency strategists at JPMorgan, another major currency trading bank, said that in futures markets, short dollar positions had now been “neutralized.”
JPMorgan expects the dollar index – a gauge of the currency’s strength against a basket of rivals – to rise from its current level of 104 to between 106 and 108 by the end of June, driven by the relative strength of the U.S. economy.
Last week, the IMF raised its 2024 U.S. growth projection to 2.1 percent, up from a previous October forecast of 1.5 percent. For the euro zone, it cut its growth projection to 0.9 percent from 1.2 percent.
“There’s a substantial amount of exceptionalism in U.S. growth relative to China and Europe and that’s just not going to go away,” said Meera Chandan, co-head of global currency strategy at JPMorgan, adding that she thought the euro could fall. to parity with the dollar this year, from its current level of $1,077.
JPMorgan economists predict the Federal Reserve will lower rates for the first time in June, later than more than half of central banks globally. “If the Fed were the only option, then the dollar would be weakening quite a bit, but that is not the case,” Chandan said.
The possibility of a Donald Trump victory in this year’s presidential election (particularly the former president’s promise to impose tariffs on imports to the United States) could also become a tailwind for the dollar.
Chandan said the tariffs would likely hurt the economic growth of America’s trading partners, weakening their currencies against the dollar.
Predictions of a rising dollar come after investors were stunned last week when official figures showed the US economy had added 353,000 jobs in January, almost double what had been predicted.
“The market [previously] We had a tendency to ignore some of the better economic data as an anomaly,” said Jane Foley, head of foreign exchange strategy at Rabobank. “Last week’s payroll data was so strong [that it] It was impossible to ignore it. “The market couldn’t help but assume that the U.S. economy is going to be stronger for longer.”
Other investors have followed in the footsteps of hedge funds by buying dollars in recent weeks, according to Michael Metcalfe, head of macro strategy at State Street, which custody $40 trillion in assets. He said asset managers had been “big sellers” of the currency between the October payroll report and mid-January, but that flows into dollar assets had since resumed.
In contrast, he said asset managers had been consistently underweight euro-denominated assets in recent months, “suggesting that the gloomy outlook for the euro remains more entrenched and somewhat independent of fluctuations in rate expectations.” of the United States”.
Despite the recent shift in positioning, some analysts believe the dollar’s decline has simply been delayed. Investors were “precise” in predicting aggressive Federal Reserve cuts late last year, and this year’s rally has been driven by a correction to that view, according to Athanasios Vamvakidis, global head of G10 FX strategy at Bank of America.
“We still believe we will see some weakness in the dollar this year, but we think it’s basically a story for the second half of the year now,” Vamvakidis said.
