The U.S. dollar fell for a fourth consecutive day on Friday to its lowest in more than two months as investors took the view that most of the recent hawkishness from the U.S. central bank has already been priced in.
With hedge fund positioning holding close to the highest since early 2020 and terminal U.S. rate pricing signalling peak rates at below 2%, far below the highs of previous Federal Reserve rate cycles, investors took profits on long dollar bets. On Friday, the greenback slipped 0.2% to 94.62 against a basket of currencies, its lowest since early November. On a weekly basis, it is set to weaken 1.11%, its biggest drop since December 2020. On Thursday, it fell below a 100 day moving average for the first time since June 2021.
HSBC strategists said markets were increasingly concerned about the impact of the Fed’s intentions on economic growth, from the tapering and shrinking of the central bank’s balance sheet to likely higher interest rates. “In other words, the market is unsure whether this is a good or bad thing for the USD,” they said.
Against its rivals, the dollar’s losses were most pronounced versus the Japanese yen and the Chinese yuan, against which it declined 0.4% and 0.3% respectively. While the safe-haven yen benefited from weakness in global stocks, a Reuters report that the Bank of Japan is deliberating how it can start telegraphing an eventual rate increase sent the Australian dollar and U.S. Treasury yields lower, which also weighed on the greenback.
The dollar’s doldrums have escalated this week even as U.S. interest rate futures have all but locked in four rate rises this year. But longer-dated yields have fallen slightly on hawkish comments from Fed officials about reducing the bank’s balance sheet with Fed fund futures signalling U.S. interest rates will peak by mid-2023.
The euro is up more than 1% for the week so far and has punched out of a range it has held since late November, hitting its highest since Nov. 11 at $1.1483. Positioning data on trading platform IG showed traders were largely neutral. Sterling gained, defying a political crisis threatening Prime Minister Boris Johnson’s position, with the pound heading for a fourth consecutive weekly gain of more than 0.5%. It was last bought at $1.3730.
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