Hedge funds are betting the greenback’s longest stretch of weekly declines in almost three years is about to reverse after investors ramped up pricing for Federal Reserve interest-rate cuts to extreme levels.
(Bloomberg) — Hedge funds are betting the greenback’s longest stretch of weekly declines in almost three years is about to reverse after investors ramped up pricing for Federal Reserve interest-rate cuts to extreme levels.
Leveraged funds were net short all major currencies against the dollar last week, the first time that’s occurred since January 2022, according to the latest Commodity Futures Trading Commission data. While a gauge of overall investor positioning remains bearish on the greenback, the broad degree of optimism among hedge funds may signal receding concern over the impact of the banking crisis on the Fed’s willingness to battle inflation.
The bets notched up a win and the Bloomberg Dollar Spot Index rose for a second straight day on Monday. The rebound was led by Fed Governor Christopher Waller saying he favored more rate hikes to combat persistently high prices, as well as an unexpected surge in a gauge of consumer inflation expectations and better-than-expected US retail sales.
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Traders will watch data including initial jobless claims this week as they seek to gauge the central bank’s policy path.
Last Tuesday, traders were pricing for a possible Fed hike in May followed by a switch to cuts as early as July, according to data compiled by Bloomberg. Markets now signal a small chance of a rate cut in September and a bigger one in November. Altogether, markets are implying about 50 basis points in rate reductions by the end of the year, compared with expectations of about 65 basis points for much of last week.
“Market pricing of November is too early for the FOMC to cut the funds rate given the high US underlying inflation pulse,” Joseph Capurso and Kristina Clifton, strategists at Commonwealth Bank of Australia wrote in a note to clients. The dollar is likely to recover its losses over coming months even if it tracks lower this week should US economic data disappoint, they wrote.
The greenback has bounced back from a more than two-month low reached late last week, when it closed out a run of five straight weekly losses, the longest losing streak since July 2020.
–With assistance from Aline Oyamada, David Watkins, Anya Andrianova and Edward Bolingbroke.
(Updates pricing throughout.)
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