US Dollar Bears Take Over Markets as Fed Expected to Slow Hikes

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Dollar trade is rapidly becoming one of the most widely used macro short options for purchasers.

Despite the dollar’s recent rise from an eight-month low point, its future remains uncertain as many now believe that the Federal Reserve will decrease its rate of raising interest. It could lead to extended selling pressure on America’s currency in the days and weeks ahead.

Despite small advances, the Bloomberg Dollar Spot Index has dropped almost 2% this year as investors unload their US dollar holdings.

As the inflation expectations in the United States become more manageable, funds are moving away from their haven asset, which has sparked an upsurge in major currencies.

Just two weeks into the year, and it feels like the big ‘buy dollar’ trade of 2022 is turning into the hottest macro short now. A reversal is also driving us in China with zero COVID scrapped well ahead of when it was expected.” said Patrick Bennett, strategist at the Canadian Imperial Bank of Commerce in Hong Kong.

Recently, the US dollar has experienced a sharp reversal of fortune as funds from JPMorgan Asset Management to Goldman Sachs predict that the Federal Reserve will soon reduce its rate tightening. Traders now expect the Fed fund rate to reach 4.94%, down significantly from earlier forecasts of 5%.

The Bloomberg Dollar Spot Index plummeted as far as 0.4% to hit the least level since April 2022 before recovering losses slightly and trading at 0.1% higher on the day. 

According to Morgan Stanley strategists, more drops may be upcoming this year with a predicted euro-end of 1.15 – notably above their prior estimation of 1.08 for 2021’s result.

The dollar is under pressure as the market becomes more confident a Fed pause is coming,” said Rodrigo Catril, National Australia Bank in Sydney strategist.

All of the forces preventing a weakening US dollar are now intensifying it. Economic growth is increasing, doubts about macroeconomic and inflation trends have decreased, and the USD’s traditional carry advantage has diminished rapidly.

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