Hedge funds bet on weakening US dollar throughout 2021

Treasury Secretary-designate Janet Yellen is expected to declare that the authorities won’t seek a weaker US dollar to boost exports in her testimony on Tuesday. AP

The dollar’s downtrend may be set to resume.

Hedge funds boosted net short positions in the greenback to their highest level since April 2018 in the week through to January 12, according to data aggregated from the Commodity Futures Trading Commission. They also raised net bullish bets on the pound to the most since October and wagered on the euro and the Australian and New Zealand currencies to rise.

The bets come as the world’s reserve currency enjoys a reprieve from a two-year slide after US yields climbed to a 10-month high. A renewed bout of weakness in the dollar may amplify scrutiny of the incoming US administration’s policy, with Treasury Secretary-designate Janet Yellen expected to declare that the authorities won’t seek a weaker currency to boost exports in her testimony on Tuesday.

“The dollar is still likely to move lower over the course of the year,” Seamus Mac Gorain, head of global rates at JPMorgan Asset Management, said last week. “Many of the currencies which are more levered to global growth, particularly emerging market currencies” and the Aussie are set to strengthen, he said.

The Bloomberg Dollar Spot Index has climbed more than 1 per cent since sliding to the lowest in almost three years this month. While the gains have fuelled talk about a rebound, some including Goldman Sachs and investors in a Bank of America survey remain steadfast in forecasting a weaker greenback.

“We continue to believe that the combination of high dollar valuations, low nominal and real rates, and a rapid recovery in the global economy will weigh on the greenback throughout 2021,” Goldman strategists wrote in a January 17 note.

Ms Yellen is expected to affirm the US's commitment to a market-determined dollar value and give assurances that it won't seek a weaker dollar for competitive trade advantage, The Wall Street Journal reported, citing President-elect Joe Biden transition officials familiar with her preparation for her confirmation hearing.

The US adopted a policy of favouring a “strong” dollar in 1995. While the mantra did evolve from one Treasury chief to another, no administration from then until the Trump years communicated, as the president did in 2017, that the dollar was “getting too strong”.

“This is not the same as the strong-dollar policy of the past,” Khoon Goh, head of Asia research at ANZ Bank, said of Ms Yellen’s expected upcoming remarks. “A commitment to market-determined exchange rates implies that the new administration will be comfortable with further dollar weakness.”