Hedge funds say it’s too risky to bet against the US dollar on Fed rates hazard, China policy limp
- Hedge funds are among those caught out by dollar’s longest rally since 2005, having wagered against the US currency since June
- ‘The continued reopening, stimulus and dollar weakening will catalyse a multi-year rally in emerging markets, China,’ Great Hill Capital says
K2 Asset Management says the greenback will continue to charge higher as US interest rates remain elevated, while AVM Capital expects rising Treasury yields to boost the currency. Alternative asset manager Clocktower Group sees further gains for the dollar if China’s stimulus continues to disappoint.
“It does look too risky to short the dollar,” said George Boubouras, head of research at K2, who sees it advancing against the Australian dollar and other currencies that are sensitive to risk sentiment. “The higher-for-longer Fed funds rate theme will dominate and markets will start pricing in rate cuts in 2024 a number of times, we believe, unsuccessfully.”
The Bloomberg Dollar Spot Index is on track for an eighth week of gain, the longest rally since 2005. Signs that the US economy is headed for a soft landing are bolstering bets that the Federal Reserve will keep borrowing costs higher for longer, which would burnish the greenback’s appeal. Hedge funds are among those caught out, as they have been betting against the US currency since June.
BNP Paribas Asset Management forecast in July that the currency will remain weak in the coming months while Standard Bank predicted that it will enter “a multi-year downtrend” as the Fed starts to ease. Swap traders are pricing in 75 basis points of rate cuts from the Fed between January and the end of the third quarter.
