Investors Ditch US Dollar At The Fastest Pace In A Year

BY Benzinga | ECONOMIC | 11/24/23 10:13 AM EST

Investors are ditching U.S. dollar holdings at the fastest pace seen in a year as they position for an end to the Federal Reserve’s rate hike cycle and look ahead to possible rate cuts in the first few months of 2024.

The dollar index (DXY) has lost nearly 3% since the start of November, putting the measure ? which tracks the performance of the dollar against a basket of rival currencies ? on course for its worst month in more than a year.

In the same period of time, the Invesco DB USD Index Bearish ETF , which tracks bearish sentiment on the dollar, has gained 2.8%, while the Invesco DB USD Index Bullish Fund ETF , tracking bullish sentiment, has fallen 2.3%.

Asset Managers Selling Dollar Positions

According to data from State Street, published on Friday in the Financial Times, asset managers are on track to sell 1.6% of their open dollar positions this month, the largest monthly outflow since November 2022.

The bank added that asset managers had sold “significant” dollar holdings each day since the Nov. 3 payrolls report that showed unexpectedly weak jobs growth.

Also Read: Foreign Buyers Desert US Treasury Bond Market As Supply Increases

State Street’s data is not the first evidence that dollar assets are being sold. Recent Treasury Department data showed foreign investors were net sellers of U.S. government bonds (Treasuries) in September to the tune of $1.7 billion. This was the first time foreign investors were net sellers in more than two years.

The iShares iBonds Dec 2033 Term Treasury ETF (IBTO) , which tracks the performance of the 10-year Treasury, was down 1.9% in morning trade on Friday.

Fed Rate Hike Cycle At An End?

Pressure on dollar assets is coming from rising expectations that the Federal Reserve’s cycle of interest rate increases to tackle inflation is at an end. The Fed made its last rate hike in July setting the Fed Funds rate at between 5.25% and 5.5%, and has held the rate there at two subsequent meetings.

Earlier this month inflation data showed that consumer prices were dropping faster than the market expected. On this day alone, the dollar index dropped 1.5%. Furthermore, economists now believe a downturn in growth is on the way as job growth slows and post-pandemic demand fades.

“The U.S. data are likely to confirm a sharp slowdown at the start of the fourth quarter, and the market is pricing in nearly four rates cuts by the Federal Reserve, with around a 75% chance the first one is in next May,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.

Jane Foley, senior FX strategist at Rabobank, agreed: “The market now anticipates that the Fed may be at the peak of the hiking cycle and currently sees potential for a rate cut in the first quarter of 2024.”

Recent dollar losses, however, are only a partial unwind of the massive rally seen in the first three quarters of 2022 as the Fed embarked on its policy tightening program.

Between Jan. 1 and Sept. 28, the dollar index jumped 28% from 95.97 to a peak of 114.78. The measure currently stands at 103.63.

Now Read: Barclays Plans To Cut Up To 2000 Jobs To Save Up To $1.25B: Report

Photo: Shutterstock

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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