Hedge Funds, Wall Street Doubling the Dollar

The dollar’s rally has a long way to go, and those who stand in its way risk being overwhelmed by its unstoppable power.

That’s the view from hedge funds and investment banks from New York to Melbourne as Bloomberg’s gauge of the world’s reserve currency surges past its pandemic peak to a new record.

The potential catalysts are numerous and lie on both sides of the dollar-smile argument, suggesting the US currency can benefit in times of strong growth and during economic slowdowns. Investors say it may only be a matter of time before anything from a hawkish Federal Reserve to a global recession drives the greenback higher.

“Don’t fight it, it’s not yet the right time to go against the strength of the dollar,” said George Boubouras, head of research at hedge fund K2 Asset Management in Melbourne, who sees the greenback rising against everything from emerging market currencies to the euro. “You can’t see the bottom of recession risks in developed markets – it’s too hard to short the dollar anytime soon.”

Boubouras is one of a parade of dollar bulls.

Bank of America expects the U.S. currency to continue strengthening through the end of the year as the Fed raises rates to combat the hottest inflation in decades. Citigroup Inc. says demand for dollars and the currency’s exceptional reserve status remain unmatched, while Goldman Sachs Group Inc. sees strong growth in the greenback against emerging rivals such as the Brazilian real and the South African rand.

“The earliest turning point we can foresee is 4Q22, when the Fed potentially moves from autopilot to more data reliance and there is some sequential improvement in China’s growth,” Adarsh ​​Sinha, strategist at BofA, wrote in a note . “Until then, the path of least resistance remains a stronger USD.”

The Bloomberg Dollar Spot index, which tracks the greenback against a basket of developed and emerging market currencies, rose as much as 0.8 percent on Thursday, pushing it above the mark it hit in March 2020, with the previous peak in the data extending until 2005

Investor positioning remains solidly bullish but far from extreme levels, according to data compiled by the Commodity Futures and Trading Commission. A measure of combined net non-traded futures positions against major peers shows about $16 billion in bullish bets, compared with nearly $36 billion in mid-2019.

The Bloomberg Dollar Index has risen 10% so far this year, a rise that has left a trail of devastated peers in its wake.

The yen fell to a fresh 24-year low, while the euro fell below parity for the first time in two decades after US inflation data again beat expectations on Wednesday. Virtually every emerging market currency tracked by Bloomberg has fallen against the greenback this year.

“It looks like the current phase of dollar strengthening will continue for some time, at least until the Fed signals that aggressive tightening is no longer necessary,” said Wai Ho Leong, strategist at hedge fund Modular Asset Management in Singapore. “We may be approaching that tipping point, but it’s hard to say when that change in direction will occur.”

Certainly not everyone is betting that the dollar’s strength will continue.

Thomas Hayes of hedge fund Great Hill Capital LLC thinks the currency will fall by the end of the year. The big catalyst will be a change in Bank of Japan policy that will boost the yen, the New York-based fund chairman said.

But until then, few investors seem willing to stand in the way of the rising greenback. Case in point: The ICE U.S. dollar index, a gauge that compares the currency only against developed peers, has already surpassed its pandemic peak and is trading near its strongest value in two decades.

“Congratulations King USD,” Citi strategists including Jamie Fahey wrote in a note on Wednesday. “Until either the Federal Reserve turns dovish or global growth expectations bottom out, the dollar will remain king.”

Ruth Carson reports for Bloomberg News.

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