Traders betting big on a weaker US dollar are facing disappointment – at least for now – as the greenback remains resilient following the Federal Reserve’s half-point interest-rate cut.
Despite a Bloomberg gauge of the greenback closing out a third week of losses, the measure is little changed since the Fed announced the reduction on Wednesday (Sep 18). In the days ahead of the Federal Open Market Committee (FOMC) meeting, hedge funds, asset managers and other speculative futures traders held some US$9.3 billion in wagers against the greenback, according to the latest Commodity Futures Trading Commission (CFTC) data through Sep 17 – down about US$5.5 billion from the week prior but still elevated. Lower interest rates typically weigh on a country’s currency, prompting traders to ramp up bets against the US dollar.
US dollar selling has been subdued since the Fed lowered borrowing costs after holding them steady for more than a year, likely because the central bank’s projections signal a more gradual path of monetary easing.
Chair Jerome Powell acknowledged in his comments on Wednesday that the Fed’s long-run, neutral rate of interest, or R*, is likely higher than before the pandemic, muddying the outlook for the greenback in the context of other major global economies. That could help keep the US dollar strong, Kit Juckes, head of foreign-exchange strategy at Societe Generale, wrote in a Friday note before the CFTC data was released.
Juckes, who estimates the nominal US neutral rate at just under 3 per cent, said that “as long as R* in Europe and Asia is (much) lower than in the US, capital will be drawn to the dollar”.
Still, some market watchers expect the long-awaited easing will weigh on the US dollar in the near-term as the US loses some of its appeal as rates come down from a two-decade high. Swaps pricing signals around 70 basis points more of Fed cuts to come in 2024.
“We’ve seen fluctuations like this throughout the year, but with more interest rate cuts expected, we anticipate a weaker dollar against the major currencies through the end of the year,” Andy Gage, a senior vice-president of FX solutions and advisory services at corporate treasury management firm Kyriba Corp, wrote ahead of the CFTC data release. BLOOMBERG
