Speculative Traders Turn Short Dollar As Fed Rate Cuts Loom

(Bloomberg) -- Speculative traders turned bearish on the dollar for the first time since February as the Federal Reserve looks set to kick off its easing cycle in September.

Hedge funds, asset managers and other players in the futures market are, on net, positioning for declines in the US currency, according to the latest Commodity Futures Trading Commission data, which covers the week ending Aug. 27. Traders have wagered some $9.8 billion tied to more losses for the dollar, the most since January.

At the same time, leveraged funds took a bullish stance on the euro and started betting against the Mexican peso.

The shift in positioning comes amid a decline in a key gauge of the greenback, which slumped 1.6% in August — the biggest monthly drop this year. Traders have been pressuring the dollar and US bond yields lower in anticipation that US policymakers will cut interest rates by at least a quarter-point in September.

“We would not push back too hard against the dollar’s soft August,” Goldman Sachs currency strategists led by Kamakshya Trivedi wrote in a Friday note ahead of the release of the CFTC data. “We would however push back against significant further weakening in the dollar without a shift in relative growth and asset return prospects.” 

Speculative traders last held a net short position in the dollar in February, back when traders were prematurely pricing in roughly a half-dozen rate cuts in 2024. 

This time, though, Fed officials have clearly signaled the intention to start easing for the first time since 2020. Swaps traders are now pricing in a full percentage point of interest-rate reductions from the Fed this year.

Positioning Shifts

Elsewhere, leveraged funds turned bullish on the euro for the first time since early June on speculation the European Central Bank will cut interest rates by less than the Fed.

The euro has surged in August against a weaker US dollar as traders focused in on the path ahead for global borrowing costs.

Those funds also switched to a negative stance on the Mexican peso for the first time since May 2023, according to the CFTC data, underscoring a recent run of declines in the currency.

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