US dollar shorts become favourite trade as Fed seen slowing rate hikes

Against the Singapore dollar, the US currency weakened 0.2 per cent to 1.3163 as of 12.10pm on Jan 16, 2023. PHOTO: EPA-EFE

SINGAPORE – Investors are selling the United States dollar in droves as bets mount that the US Federal Reserve will slow the pace of its interest rate hikes.

The Bloomberg Dollar Spot Index fell to the lowest in almost nine months on Monday as easing US inflation expectations prompted funds to ditch the ultimate haven asset. Every major currency in the world rallied against the greenback, with the Australian dollar and the renminbi advancing to key levels.

Against the Singapore dollar, the US currency weakened 0.2 per cent to 1.3163 as at 12.10pm on Monday. This makes for a 1.7 per cent drop so far in 2023 and the greenback’s lowest rate against the Singdollar since April 2018.

“Just two weeks into the year, and it feels like the big ‘buy dollar’ trade of 2022 is turning into the hottest macro short now,” said strategist Patrick Bennett from the Canadian Imperial Bank of Commerce in Hong Kong.

In addition to the Fed, “we are also being driven by a reversal in China with zero-Covid scrapped well ahead of when it was expected”.

The dollar’s fortunes have suffered a dramatic U-turn in recent months as funds from JPMorgan Asset Management to Goldman Sachs Group predict the Fed will soon rein in the pace of its tightening. Traders are now expecting the Fed fund rate to peak at 4.94 per cent from more than 5 per cent earlier in January.

The Bloomberg Dollar Spot Index dropped as much as 0.4 per cent to reach the lowest since April 2022 on Monday.

The resumption of economic activity in China is bolstering demand for risk-sensitive currencies, with the Australian dollar rising above 70 cents for the first time since August on Monday. Indonesia’s rupiah climbed more than 1 per cent, the South Korean won advanced 0.8 per cent and the offshore renminbi rose to the strongest since July.

“The dollar is under pressure as the market becomes more confident a Fed pause is coming,” said Mr Rodrigo Catril, strategist at National Australia Bank in Sydney. The rise of the renminbi is “just as important” for commodity-linked currencies like the Australian dollar as risk sentiment improves, he said. BLOOMBERG

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