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Hedge funds flip from bearish to bullish on US dollar bet

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Hedge funds’ bets have switched from bearish to bullish after the US economy’s unexpected job surge in the first six weeks of 2024 boosted optimism for the dollar, which has climbed nearly 3% so far this year, according to a report by the Financial Times citing executives at Citibank, JPMorgan, Rabobank and State Street. 

Citibank, one of the world’s largest foreign exchange trading banks, reported that funds had “closed all of their short US dollar exposure in aggregate”, with their long positions now equal to more than 80% of their maximum exposure over the past year. Sam Hewson, Head of FX Sales at Citibank, explained that “the consensus view of dollar weakness coming into the year was wrong and people have flipped their positions”, adding that a lot of hedge funds had been forced to cover their shorts as “the early 2024 playbook was adjusted”.

Michael Metcalfe, Head of Macro Strategy at State Street, the largest custodian bank in the world with $40tn in assets, said that other investors had followed hedge funds in buying dollars in recent weeks, adding that asset managers had been “heavy sellers” of the currency between October’s payroll report and the mid-January, but flows into dollar assets had since resumed.

The US Department of Labor’s statistics agency reported last week that the US economy had added over 350,000 jobs last month, which has driven dollar optimism. Jane Foley, Head of FX Strategy at Rabobank, dismissed the market’s tendency to view positive economic data as an anomaly, saying: “The payrolls data last week was so strong [that it] was impossible to shrug off. The market couldn’t avoid the assumption that the US economy is going to be stronger for longer.”

Athanasios Vamvakidis, Global Head of G10 FX Strategy at Bank of America, saw this year’s rally as corrective believing investors were “jumping the gun” by predicting aggressive Fed cuts in late 2023.

Officials at the US Federal Reserve have pushed back against these rate cut bets. The report quoted Jay Powell, who chairs the Federal Reserve, on CBS’s 60 Minutes, in saying that he expected about three quarter-point rate cuts in 2024, when markets are currently pricing in four or five rate reductions — down from six or seven in late 2023.

In futures markets, short positions on the dollar have now “neutralised”, according to FX strategists at JPMorgan, another large foreign exchange trading bank. JPMorgan expects the dollar index to rise from its current level of 104 to between 106 and 108 by the end of June.

Last week, the IMF raised its US growth projection for 2024 to 2.1% from an October 2023 forecast of 1.5%. For the euro area, growth projection was cut from 1.2% to 0.9%.
Meera Chandan, Co-Head of Global FX Strategy at JPMorgan, said: “There’s a substantial amount of US growth exceptionalism relative to China and Europe and that just isn’t going away.”

Former US President Donald Trump, who has emerged as the likely runner for the Republican spot in this year’s presidential election, has pledged to impose tariffs on imports to the US, which could act as a further boost to the dollar. According to Chandan, these tariffs would likely hurt the economic growth of US trading partners and weaken their currencies against the US dollar.

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