A resilient US economy and deepening geopolitical tensions around the world are making asset managers rethink their expectations for a weaker dollar.
Investors such as pension funds, insurance firms and mutual funds halved their net dollar short positions to $2.05 billion as of Dec. 3 from a week earlier, the least since April 2017, according to Commodity Futures Trading Commission data compiled by Bloomberg. Hedge funds boosted their bullish bets by 9.3%, having held a favorable view on the US currency since October, the data show.
Bloomberg’s dollar gauge has advanced about 5% since dropping to an eight-month low in late September as traders positioned for higher US inflation under a Donald Trump presidency. Growing risks to Federal Reserve’s interest-rate cuts and haven demand amid geopolitical tensions are also supporting the greenback, though Wall Street banks are forecasting it to trend lower next year.
Last week some Fed speakers sounded cautious over rate cuts, which supported the dollar. St. Louis Fed President Alberto Musalem said that it may be appropriate to pause interest-rate cuts as soon as this month, while his San Francisco counterpart Mary Daly said there’s no sense of urgency to lower interest rates. Chicago Fed President Austan Goolsbee said he expects interest rates to be “a fair bit lower” a year from now.
“It’s clear from Fed comments last week that officials, excluding Goolsbee, are worried about sticky inflation and therefore preparing the markets for a pause,” Brown Brothers Harriman & Co. strategists including Win Thin wrote in a note. “This week’s inflation data will be key and any signs of accelerating price pressures would upend the December cut narrative and help boost the dollar.”
Traders ramped up expectations for a rate cut this month to 80% after a mixed employment report on Friday. They’re now watching November inflation data release this week with Fed speakers in a blackout period before the central bank’s Dec. 18 decision.
Meanwhile, the fall of Bashar Al-Assad’s regime in Syria, political uncertainty in South Korea after the botched imposition of martial law last week as well as the recent non-confidence vote against the French government is also fanning the demand for dollars.
“Investors are looking for safe havens given the political turmoil in France and South Korea, which is adding to the US dollar’s safe-haven with yield appeal,” said David Forrester, a senior strategist at Credit Agricole CIB in Singapore.
A currency-wise breakdown of the CFTC data show the euro had a dominant share in asset managers’ positions with their bullish bets standing at $23.4 billion, even though they’ve dropped from a peak of $64 billion in May 2023. These investors were bearish on the Canadian dollar, pound and Swiss franc.
Leveraged funds had combined dollar longs worth $14.4 billion, mainly on the back of bearish wagers on the euro and Canadian dollar, the data show. This group of investors are typically more nimble to changing market trends.
“How the rest of the world sees the US dollar in 2025 and how that compares to gold or Bitcoin or just the euro will matter for risk across all markets with US debt funding, US trade and US value all wrapped up in the dollar being the only choice in a world full of uncertainty,” said Bob Savage, head of markets strategy and insights at BNY in New York.
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