By Jamie McGeever
ORLANDO, Florida (Reuters) – As Donald Trump begins his second term as U.S. president, currency speculators are giving the dollar their strongest backing since before he was first given keys to the White House.
The question now is whether this signals more USD strength ahead or marks the peak of the current cycle for the “mighty dollar”, as Trump referred to the greenback late last year.
The bullish dollar trade has had a remarkable run since late September when investors began betting on a stronger U.S. economy, ‘higher for longer’ U.S. interest rates, and a Trump victory.
In the three and a half months since then, Commodity Futures Trading Commission funds have flipped a leveraged net short dollar position against major and key emerging market currencies worth around $15 billion to a leveraged net long position worth over $35 billion. That’s the biggest ‘long’ since January 2016.
A long position is essentially a bet that an asset will rise in value, and a short position is a wager its price will fall.
At the same time, the dollar index, a measure of the dollar’s value against its G10 peers, rose 10% to its highest level in more than two years, posting multi-year peaks against sterling and the Canadian dollar as well as record highs against emerging market currencies like the Brazilian real and Indian rupee.
As the ‘Trump 2.0’ era begins, the dollar index is some 20% higher than its average over the past quarter of a century and at levels rarely seen since the 1980s. As Societe Generale’s Kit Juckes notes, the dollar might be “mighty” but may also be “getting a little bit ahead of itself.”
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Analysts at Morgan Stanley agree, announcing on Friday that they were turning bearish on the dollar and recommend selling it against the euro, sterling and yen.
They argue that most of the economic fundamentals and dynamics that have strengthened the dollar recently – and there have been many – are fully priced into the dollar’s exchange rate or even over-priced in some cases.
They suggest that Treasury yields have topped out, the “U.S. exceptionalism” narrative has little juice left in it, investors are too optimistic on the size and scope of Trump’s dollar-friendly tariffs, and the doom and gloom surrounding Europe’s fortunes is overdone.
Put all that together, and the near-term outlook for the dollar isn’t all that rosy, at least from a tactical if not long-term fundamental perspective, especially with fund and investor positioning so one-sided.
As Morgan Stanley’s FX strategists wrote on Friday, “we acknowledge that there is considerable uncertainty about the sequencing and outcome of U.S. policy. But in the near term, we think the asymmetric risk clearly favors dollar weakness alongside lower yields.”
Their take on the dollar certainly isn’t unanimous. For example, analysts at Goldman Sachs last week upgraded their bullish dollar outlook citing continued U.S. economic outperformance, supportive Treasury yields, and the belief that the dollar-positive impact of Trump’s expected tariffs has not yet fully been priced in.
Still, given speculators’ stretched dollar positions, it might not take much to send the “mighty dollar” sliding from this lofty height.
And right on cue, a Trump administration official on Monday said that tariffs will not be slapped on U.S. trading partners immediately. This pushed the dollar down more than 1%, putting it on track for its worst day since August.
(The opinions expressed here are those of the author, a columnist for Reuters)
(By Jamie McGeever; Editing by Andrea Ricci)
