Short position drops sharply to 2.05 billion! How exaggerated is the optimism towards the US dollar?

2024-12-09 1830

The resilience of the US economy and the intensification of global geopolitical tensions are prompting asset management companies to reconsider their expectations of a weaker US dollar.

As the resilience of the US economy strengthens and global geopolitical tensions intensify, asset management companies are beginning to reassess their expectations of a weaker US dollar.

According to data from the Commodity Futures Trading Commission (CFTC), as of December 3, investors such as pension funds, insurance companies, and mutual funds have halved their net US dollar short positions to $2.05 billion, the lowest level since April 2017. The same data shows that hedge funds have been optimistic about the US dollar since October, increasing their long positions by 9.3% last week.

Since hitting an eight month low at the end of September, the Bloomberg dollar index has risen by about 5%, and investors expect US inflation to rise during President Trump's tenure. The potential risk of the Federal Reserve cutting interest rates, as well as the hedging demand triggered by geopolitical tensions, are also supporting the US dollar. Nevertheless, Wall Street banks still predict that the US dollar will weaken next year.

Interpretation of the Federal Reserve's interest rate hike path

Last week, cautious statements from Federal Reserve officials further supported the US dollar. For example, Alberto Musalem, the President of the St. Louis Federal Reserve, stated that suspending interest rate cuts this month may be appropriate, while Mary Daley, the President of the San Francisco Federal Reserve, stated that there is no urgency to further reduce interest rates. Chicago Fed President Austin Goolsby predicts that interest rates will be "significantly lower" than current levels in one year.

Based on last week's comments from the Federal Reserve, apart from Gulsby, other officials expressed concerns about stubborn inflation and are conveying expectations of a pause in interest rate cuts to the market, "said a strategist at Brown Brothers Harriman in a report." This week's inflation data is crucial, and any signs of increased price pressure could break expectations of a December rate cut and boost the US dollar

The demand for safe haven in the US dollar has increased

The downfall of the Bashar al Assad regime in Syria, political turmoil in South Korea (including the failed implementation of martial law last week), and a vote of no confidence by the French government are all exacerbating the demand for safe haven against the US dollar.

David Forrester, senior strategist at Credit Agricole France, pointed out that "amid the political turmoil in France and South Korea, investors are seeking safe haven assets, which enhances the safe haven and yield appeal of the US dollar

According to CFTC data, asset management companies have a bullish position of $23.4 billion in the euro, although this value has decreased from its peak of $64 billion in May 2023. Meanwhile, these investors hold a bearish attitude towards the Canadian dollar, British pound, and Swiss franc.

The total value of dollar long positions in leveraged funds is $14.4 billion, mainly from bearish bets on the euro and Canadian dollar. These types of investors are usually more sensitive to constantly changing market trends.

Bob Savage, head of market strategy and insight at Bank of New York Mellon, pointed out: "How the world views the US dollar in 2025, compared with gold, BTC or the euro, will affect the risks of all markets. The US debt financing, trade and the global position of the US dollar are closely related to the unique position of the US dollar in this uncertain world."

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