Hedge funds that have racked up the largest bets against the
dollar in almost three years may be running headlong into a short squeeze.
With markets on edge over resurgent coronavirus cases and a
contentious U.S. presidential election, predictions of the currency's demise as
the world's No. 1 haven appear premature. Investors went into the greenback's
strongest rally since April last week expecting losses against all but one of
the currencies of the Group of 10 industrialized nations, the first time that's
happened since 2013, according to ING Groep.
Few of those bets have been covered, according to the latest
data. Speculative positions in futures linked to the ICE U.S. Dollar index
turned the most negative since November 2017, according to Commodity Futures
Trading Commission data through Sept. 22. That suggests speculators might only
be beginning to enter a world of pain.
"Dollar shorts were at multiyear highs, you surely
cannot assume they have all been trimmed last week," ING currency
strategist Francesco Pesole said by email. "There is definitely more room
for the dollar to benefit from position squaring."
It serves to highlight the perils of taking wagers out
against the dollar against the multitude of uncertainties reaped by the global
pandemic. Toronto Dominion Bank described international foreign-exchange
markets as between "rock and a hard place," while J.P. Morgan Chase
said last week that the seasons had shifted into a "dangerous"
year-end trading cycle, which promised to be "two directional" for the
dollar.
Throughout the summer, talk of a V-shaped recovery and
trillions of dollars of stimulus had boosted reflation trades over defensive
assets like the dollar. But the latest Federal Reserve policy meeting fell
short of any concrete steps for more stimulus even while pandemic restrictions
threaten to stifle economic green shoots.
The Bloomberg dollar index was little changed Tuesday at
8:42 a.m. in London, on course for its first monthly gain since March after
rebounding more than 2% from the 2-year low it hit Sept. 1.
"I wish we had been long," said Mark Dowding,
chief investment officer at BlueBay Asset Management who turned neutral after
closing his short position on the dollar last month. "Economic data has
shown signs of disappointment, COVID is getting worse and additional stimulus
is not forthcoming."
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