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Bruised Dollar Wobbles as Traders Eye US Rate Cuts Next Year
DamonSource: Reuters
US Dollar, Battered by Rate Cut Bets, Set for Worst Year Since 2020
- Wagers on Federal Reserve easing have ramped up in December
- Pound sees biggest annual gain since 2017, franc since 2010
The dollar is poised for its worst year since the onset of the pandemic as Wall Street bets the Federal Reserve is set to lower interest-rates after safely reining in prices.
After being whipsawed by false starts calling for the end of the Fed’s rate hiking regime, a Bloomberg gauge of the greenback is down nearly 3% since January in the steepest annual drop for the US currency since 2020.
Shorting the Dollar Is Gaining Favor After Fed’s Great Pivot
Betting against the dollar is growing in popularity after the Federal Reserve upended markets by signaling the end of its monetary tightening campaign.
Non-commercial traders — a group that includes hedge funds, asset managers and other speculative market players — boosted their bearish bets on the greenback in the week ended Tuesday, according to CFTC data compiled by Bloomberg. More than 39,000 contracts are now tied to expectations the US currency will fall, up more than 10,000 from a week ago when the Fed was preparing to meet, the data show.
The dollar index edged lower on Tuesday as investors waited on fresh clues to when the Federal Reserve is likely to begin cutting interest rates as inflation falls closer to the U.S. central bank’s 2% annual target.
Currency moves were muted the day after Christmas, however, as markets in the UK, Australia, New Zealand and Hong Kong, among others, were still out for a public holiday. Many U.S. traders are also out for holidays until the New Year.
The greenback is on track to post its worst performance since 2020 against a basket of currencies as anticipation of Fed rate cuts dents the appeal of the U.S. currency relative to peers.
Many analysts expect the U.S. economy to markedly slow in 2024, but the Fed is also expected to act to ensure that the gap between the fed funds rate and realized inflation doesn’t widen too far.
If inflation falls much faster than the Fed’s benchmark rate it can tighten monetary conditions more than Fed policymakers intend and increase the risk of a hard economic landing.
Data on Friday showed U.S. prices fell in November for the first in more than 3-1/2 years, pushing the annual increase in inflation further below 3% and boosting expectations of an interest rate cut in March.
"The Fed has made considerable progress on inflation, as core started the year closer to an annual rate of 5%, though the job is not yet done in ensuring inflation is on a sustained trajectory toward its 2% target," Wells Fargo analysts said in a note.
The dollar index was last down 0.04% on the day at 101.59. It has fallen from a 20-year high of 114.78 on Sept. 28 2022 and is pace for a yearly loss of around 1.84%.
The euro was up 0.01% at $1.1024. The single currency has risen from a 20-year low of $0.9528 on Sept. 26, 2022 and is on track for a 2.90% gain this year.
The dollar gained 0.02% against the yen to 142.42. The dollar reached a 32-year high of 151.94 yen on Oct. 24, 2022, and came close to reaching this level again last month, before the Japanese currency recovered. The dollar is on pace for a 8.63% gain this year.
The yen has steadied near a recent five-month peak on the view that the Bank of Japan (BOJ) could soon mark an end to its ultra-easy policy. For most of 2022 and 2023, the policy has kept the Japanese currency under pressure as other major central banks embarked on aggressive rate-hike cycles.
BOJ Governor Kazuo Ueda said on Monday the likelihood of achieving the central bank's inflation target was "gradually rising" and it would consider changing policy if prospects of sustainably achieving the 2% target increase "sufficiently".
NEW YORK (Reuters) - A pledge from Group of 20 leaders to bring the global economy back into balance is not seen as good for the dollar in the long run, underscoring its anaemic performance in recent weeks.
Short-term reactions in other markets to the G20 meeting of rich and emerging economies in Pittsburgh this past week will be muted, analysts say, but bank stocks and energy prices could also be hurt over a longer period of time by G20 actions.
Yet the dollar is seen as most susceptible to damage after some at the G20 meeting questioned the stability of the dollar in light of its status as the world's reserve currency. For details, see
The dollar rose last week, in part because of equity market weakness, but it has fallen 4.3 percent this quarter against a basket of major currencies.
The dollar's weakness of late has not come because of U.S. economic weakness, but because of emergent recovery around the world. Investors have used the dollar as a funding currency to buy riskier assets around the world.
The U.S. economy is rebounding, largely due to increased borrowing and government stimulus, while world leaders expressed concern that these trends cannot be sustained in the long term.
They say an economic rebalancing is needed, with the United States saving more and export giant China consuming more to support its growth.
"The real problem is the world needs a huge consumer and the U.S. has been basically doing it for decades and it's spent," said David Gilmore, partner at FX Analytics in Essex, Connecticut.
World Bank President Robert Zoellick said the United States should not take the dollar's status as the key global reserve currency for granted because other options are emerging.
In excerpts released on Sunday from a speech he is to deliver on Monday, Zoellick said global economic forces were shifting and it was time now to prepare for the fact that growth will come from multiple sources.
Aside from the dollar, an agreement by the world's largest economies to phase out subsidies on oil and other carbon dioxide-spewing fossil fuels over the "medium term" in an effort to fight global warming will not likely hit energy markets in the short-term.
Longer-term, however, the move could cut fuel demand in emerging markets, weighing on energy prices.
While bank stocks should shrug off the G20 reforms in the short term, bank profits could be limited and shares pressured over the long-term if regulators enact onerous capital requirements.
✓ The Securities Industry and Financial Markets Association, Wall Street's lobbyist, said late Friday: "Taken together, these reforms could negatively impact investors, capital flows and economic growth and job creation during a period of global economic vulnerability."
BALANCING ACT
World leaders also promised to keep emergency economic support in place until a recovery is at hand, providing some relief for foreign currencies and assuring investors who were worried about a quick exit from quantitative easing.
But the pledge is a double-edged sword for the dollar, which has been hurt by extremely low interest rates and the glut of dollars in the system.
The recession has already triggered some rebalancing, with U.S. consumers cutting spending while China is spending about $600 billion (378.5 billion pounds) to stimulate its economy and make it less dependent on exports.
"So what country is going to come in and fill (the U.S.') shoes?" Gilmore asked.
✓ Analysts were quick to note that without concrete steps, the pledge amounts to lip service and it is unlikely any countries would bow to G20-imposed rules on how to run their domestic economies.
Even so, such a plan would be a marked shift and could signal a longer-term move away from the dollar.
"In the long run, I think they want another reserve currency, whether it's the Special Drawing Rights or the Chinese yuan," said Kevin Chau, currency strategist at research firm IDEAglobal in New York.
"For any country's currency to gain that kind of credibility and trust, it would take years of development," he said.
That said, the greenback fell to a fresh low against the euro and dropped below the key 90 yen-per-dollar level this week.
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