The U.S. dollar has started the year on a strong note, despite hedge funds and foreign exchange speculators doubling down on their bets against the world’s reserve currency.
Recent data from the Commodity Futures Trading Commission (CFTC) reveals that these market participants have increased their net short positions on the dollar to $12.7 billion in the week ending January 9, up from $10.5 billion the previous week.
This represents the largest net short position since August and signifies a remarkable shift of more than $22 billion from the $10 billion net long position seen in mid-November, which was the most bullish bet on the dollar in over a year.
Over the past seven weeks, funds have consistently heightened their bearish bets on the dollar, coinciding with ongoing expectations of interest rate cuts by the Federal Reserve.
Short-term interest rate spreads have moved unfavorably for the dollar in recent weeks, with the two-year U.S.-German spread narrowing by around 25 basis points this year to its lowest level since August.
Surprisingly, the dollar has shown strength against nearly every major currency in the early part of this year, including a 3% surge against the Japanese yen, leaving analysts puzzled.
Despite strong U.S. economic growth figures compared to other major economies and a relatively hawkish stance from the Federal Reserve, the CFTC positioning data suggests a contrary sentiment among currency speculators.
HSBC currency analysts have pointed out this inconsistency, highlighting the contrast between the data and the notion of U.S. exceptionalism, along with the Federal Reserve’s less dovish tone compared to market expectations.
While economic activity may decelerate, many economists have revised their predictions from a 2024 recession to a “soft landing.”
Job creation continues, and corporate earnings are on a growth trajectory of over 10%.
This stands in stark contrast to the eurozone, which faces recessionary conditions, the UK’s expected GDP growth of less than 1%, and a potentially less hawkish outlook for the Bank of Japan.
As a result, the 2024 path for other G4 central banks may turn out to be more dovish than previously thought, which could exert downward pressure on their respective currencies.
In this landscape, the broader foreign exchange market seems to be leaning towards this scenario, while hedge funds remain steadfast in their opposing stance.
As 2024 unfolds, these contrasting views on the U.S. dollar and global currencies could continue to shape market dynamics.