Picture: REUTERS
Picture: REUTERS

New York — A rout that sent the dollar to the lowest since January 2019 may have room to run.

Data from the Commodity Futures Trading Commission show that asset managers added to net long positions on the yen, the euro, the Canadian dollar and the Swiss franc, adding fuel to a sell-off that sent the Bloomberg Dollar Spot Index tumbling 3.4% in July. The gauge is poised for its worst July since 2010.

The reasons for betting against the greenback are many — a worsening row with China, concerns that the US is struggling to contain the pandemic, the uncertainty of a November presidential election, and growing expectations that the Federal Reserve will have to slash policy rates further.

“The dollar’s strength is well and truly over for now,” said George Boubouras, head of research at hedge fund K2 Asset Management, who is shorting the greenback against the Aussie. “More Fed stimulus is coming as the US grapples with the virus, and there’s also election uncertainty coming up — all of this will most likely be dollar negative.”

A Bloomberg compilation of data on net non-commercial future positions on the dollar against eight peers show the biggest short positions on the greenback since April 2018.

The dollar fell against all its G10 peers on Monday, with the Swedish krona gaining 1.2% and the yen advancing 0.9%. The Bloomberg Dollar Spot Index dropped as much as 1.0%, extending four weeks of losses, the longest streak since early 2019.

Once the standout nation in a world saturated with more than $14.7-trillion of negative yielding debt, the US has seen that edge erode as the coronavirus crisis forced the Fed to slash borrowing costs to near zero and spurred bets of negative interest rates.

Other havens

The downward pressure on the dollar has pushed investors to look to havens outside the US, sending the spot price of gold rocketing past record heights towards a high of $2,000/oz. Silver has also gained from the rally, leaping to its highest in almost seven years.

The euro is another potential candidate for money managers seeking safety. The currency’s surge past $1.17 to levels not seen since September 2018 could be the beginning stages of a shift towards the eurozone after the union banded together to agree on a historic recovery fund.

Fed expectations

The benchmark 10-year Treasury yield slipped slightly to 0.59% after posting its lowest-ever weekly close the previous session. Traders expect the Fed to signal more accommodation ahead at its July 28-29 meeting, with second-quarter growth expected to show a 35% annual rate decline.

“The dollar should continue making new lows,” said Win Thin, global head of currency strategy at Brown Brothers Harriman, who sees the euro testing September 2018 highs. “The economic underperformance of the US is likely to feed into continued underperformance of the dollar.”

The weakness has been so pronounced that it’s drawn comments from the likes of billionaire investor Ray Dalio, who says the conflict between the US and China would further harm the dollar.

Yen strength

As the world’s reserve currency slides, the yen could benefit from being an alternative haven, market participants say. A key level to watch will be 105 yen, which has held as a barrier in recent years, according to Rodrigo Catril, currency strategist at National Australia Bank.

“The [dollar] can’t find any friends at the moment, and within majors euro and [yen] are the ones to watch,” said Catril. “Since 2018, dips below 105 yen have been short lived, but with so much momentum against the [dollar], it could be different this time with many looking to add to their shorts.”

Some traders may be aiming for a repeat of 2016, when the dollar had dipped below 100 yen, he said.

Fund manager QIC sees only one pillar still standing that sets the US and its currency apart from its peers: demand for big-cap American stocks.

“US exceptionalism has eroded, the Fed is in a mindset of restoring jobs at the moment and it’s going to drive them to provide potentially more policy accommodation,” said portfolio manager Stuart Simmons. “That’s all dollar negative.”


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