Investor views on the future of the dollar are divided. As a result, trades avoiding the dollar are increasingly supported.
In recent weeks, there has been an increase in recommendations for trades that appear to offer profit regardless of how the Federal Reserve’s monetary policy or the US presidential election impacts the dollar, such as shorting the Swiss franc against the yen, and buying pounds against the New Zealand dollar.
Elsa Lignos, global head of foreign exchange strategy at RBC Capital Markets, which oversees forex sales to institutional investors in Europe, the Middle East, and Africa (EMEA), pointed out, “We are seeing a trend among investors to avoid the dollar and increase exposure to currency pairs that exclude the dollar.” She stated, “The uncertainty surrounding the US presidential election results makes it challenging to factor that into predictions or positioning.”
Such a situation is unusual for the forex market, which usually tends to follow the dollar’s movements. According to a recent survey conducted by the Bank for International Settlements (BIS), transactions involving the dollar make up 88% of the foreign exchange market, which has an overall trading volume of $7.5 trillion (approximately 1,070 trillion yen) per day. However, with discussions intensifying among US financial authorities regarding the pace of interest rate cuts and the presidential election approaching, some find the risk of anticipating a solid direction too great.
Long-Term Investors Are Shying Away From The Dollar
USD holdings are the closest to neutral in the last 2 1/2 years
According to State Street Global Markets, long-term investors’ positioning in dollars is the most neutral it has been in the past two and a half years. The company is a trading division of State Street, a major US custodian managing over $44 trillion in assets.
Wells Fargo, RBC, Allspring Global Investments, and State Street Global Advisors are all hesitant to make large investments in the dollar until the end of the year, citing political uncertainty. While hedge funds and other short-term players increased their short positions on the dollar last week, that positioning is not as extreme as it was in early September.
Instead, the market is focusing on currency pairs that do not include the dollar. RBC recommends shorting the franc against the yen due to the opposing directions of the central banks. Allspring expects the euro to decline against the Norwegian krone.
Lauren Fanfillion of Allspring stated, “The euro should decline,” adding, “It’s difficult to bet on the dollar because too many things are happening politically.”
Similarly, managers at State Street Global Advisors are holding off until after the November elections.
Aaron Hard, a portfolio manager at the firm, said, “It may be best to wait for the uncertainty surrounding growth and the passing of the presidential election,” predicting that once these issues become clearer, the dollar could “fall significantly.”
While Vice President Harris leads former President Trump by a narrow margin in polls for the US presidential election, there is weak confidence in how the election will impact the dollar. In trading on the 30th, the dollar index remained around the same level as it ended the previous week.
Original Title: Currency Traders Steer Clear of Dollar as US Election Nears (1) (excerpt)