I’ve been on at some length recently about the dollar, and specifically about recent dollar strength, which was unrelenting for eight (or nine, depending on your preferred greenback gauge) weeks in a row.
The move was driven by familiar catalysts, including rising US reals, favorable rate differentials and forward policy expectations, as the Fed’s “higher for longer” mantra gathers begrudging adherents as reflected in, for example, less aggressive rate-cut pricing for 2024.
But oil’s a factor too. The dollar, as discussed here over the weekend, is a petrocurrency now.
The new Fed dots and Jerome Powell’s press conference messaging could be pivotal. Although it’ll be hard to knock the dollar down sustainably unless and until the fundamentals improve in Europe and China, the new Fed projections need to keep the door open to one more hike this year and send an incrementally hawkish message about 2024’s cuts if the greenback is supposed to make it through Wednesday with pulling back.
With all of that in mind, it’s worth noting that hedge funds are (or at least were — the figures are delayed a week) net long for the first time in six months.
Not surprisingly, that was accompanied by a dramatic paring of euro longs headed into the ECB meeting, a prudent decision as it turned out.
Remember: What counts here are forward policy expectations. So, for example, last week’s ECB hike was accompanied by a clear indication from the Governing Council that hikes are likely over. The Fed won’t raise rates this week, but won’t close the door to additional hikes either. So, looking ahead, that’s a dovish ECB versus a relatively hawkish Fed (or, at the least, an obstinate Fed).
SocGen’s Kit Juckes, an FX veteran, weighed in on Monday. “Traders have been short dollars, most notably against the euro, for almost a year [but] that position is being unwound very quickly now, with the euro long almost halved in recent weeks, and the other longs (GBP, MXN, BRL) all reduced,” he wrote, before posing three possible interpretations:
- Backward-looking information?
- A sign that a bullish dollar view is now mainstream? or
- A sign that this move has real energy behind it and has further to go?
His answer: “I’m inclined, for now, to go with the third option. At least until remaining GBP and EUR longs have been squeezed out.”
