(July 14): The dollar rally has room to run and those who stand in its way risk getting bowled over by its unstoppable strength.
That’s the view of hedge funds and investment banks from New York to Melbourne as a Bloomberg gauge of the world’s reserve currency heads higher, breaking past its pandemic peak to a fresh record.
Potential catalysts are numerous and lie on both sides of the dollar smile argument — which suggests the US currency can benefit in times of strong growth and during an economic slowdown. Investors say it may only be a matter of time before anything from a hawkish Federal Reserve to a global recession turbocharges the greenback higher.
“Don’t fight it, it’s not the right time to go against dollar strength yet,” said George Boubouras, head of research at hedge fund K2 Asset Management in Melbourne, who sees the greenback rising against everything from emerging-market currencies to the euro. “You can’t see a bottoming out of developed-market recession risks — it’s too difficult to short the dollar anytime soon.”
Bank of America expects the US currency to continue strengthening until the end of the year as the Fed raises rates to combat the hottest inflation in decades. Citigroup Inc says dollar demand and the currency’s pre-eminent reserve status remain unparalleled, while Goldman Sachs Group Inc sees the greenback rallying hard against emerging peers such as the Brazilian real and South African rand.
“The earliest turning point we can envisage is 4Q 22 when the Fed potentially shifts from autopilot to being more data dependent, and there is some sequential improvement in China growth,” Adarsh Sinha, strategist at BofA, wrote in a note. “Until then the path of least resistance remains a stronger USD.”
The Bloomberg Dollar Spot Index, which tracks the greenback against a basket of developed- and emerging-market currencies, rose as much as 0.8% on Thursday, pushing it above the mark it hit in March 2020, the previous high in data stretching back to 2005.
Investor positioning remains solidly bullish but far from extreme levels, according to data compiled from the Commodity Futures and Trading Commission. A gauge of combined net non-commercial futures positions against major peers shows about US$16 billion of bullish bets compared to almost US$36 billion in mid-2019.
Bloomberg’s gauge of the dollar has climbed 10% already this year, a rise that has left a trail of devastated peers in its wake.
The yen has tumbled to a fresh 24-year low, while the euro dropped below parity for the first time in two decades after US inflation data once more smashed expectations on Wednesday. Virtually every emerging-market currency tracked by Bloomberg has slid against the greenback this year.
“It feels like the current phase of dollar strength will continue for a while — at least until the Fed signals that aggressive tightening is no longer necessary,” said Wai Ho Leong, strategist at hedge fund Modular Asset Management in Singapore. “We might be getting close to that tipping point, but it is hard to say when that guidance shift takes place.”
To be sure, not everyone is betting the dollar’s strength will last.
Thomas J Hayes of hedge fund Great Hill Capital LLC reckons the currency will fall by the end of the year. The big catalyst would be a policy change from the Bank of Japan which would boost the yen, said the New York-based fund chairman.
But until then, few investors seem willing to stand in the way of the rising greenback. Case in point: the ICE US Dollar Index, a gauge that only compares the currency to developed peers, has already exceeded its pandemic peak and is trading near its strongest in two decades.
“Hail King USD,” Citi strategists including Jamie Fahy wrote in a note Wednesday. “Until either the Fed turns dovish or global growth expectations bottom, the dollar will remain king.”