Pessimism Around the US Dollar

As investors anticipate the Federal Reserve might be nearing the peak of its interest-rate increase cycle, asset managers have grown increasingly bearish on the dollar.

According to data from the Commodity Futures Trading Commission on eight currency pairs compiled by Bloomberg, investors increased short bets on the reserve currency to 321,758 contracts last week, the most since July 2021. Hedge fund managers have been betting against the dollar for the fifth week.

Fed officials are declining US inflation, fueling speculation of lesser rate increases. The debate rages on whether the dollar’s best days are behind it. Goldman Sachs Group Inc., Wells Fargo, and M&G Investments are betting on dollar strengthening. They also expect the Fed to become more guarded in its approach to rate increases.

Goldman Sachs Outlook and Key FOREX-Dollar Trade Ideas

Goldman Sachs predicts that the US dollar’s strength against Asian currencies will wane in the next three to six months. More certainty appears surrounding the Federal Reserve’s policy rates.

According to the US bank, the Korean won, and the Singapore dollar is both bullish. Given the country’s increased international position and record low foreign holdings, it’s “most positive” on the Indonesian rupiah among Asia’s high-yield markets. It expects the Malaysian ringgit, Indian rupee, and Philippines peso to fall.

As the Fed’s policy tightening is scheduled to conclude next year, the argument over when the dollar will reach its peak is gaining traction. According to Morgan Stanley, the dollar should bottom this quarter and fall in 2023. This month, currencies in Asia have benefited from the possibility of China reopening. But they have retreated some gains amid rumors of more Covid cases.

It is maintaining the core long SGD/TWD trade recommendation and recommending short CNH/KRW. The market is pricing BoT and RBI rate increases. It is recommended to pay THB 5Y ND-OIS and INR 2Y ND-OIS on rates. Compared to a basket of 2Y global rates, KRW 2y IRS and SGD 2Y SORA OIS are preferable. It recommended paying INR 2Y ND-OIS in a recent rally in INR swaps.