Strategists and speculators at odds over dollar outlook

Consensus among banks is for declines but market positioning tells a different story

Eva Szalay

Wall Street’s foreign-exchange strategists are at odds with speculators over the outlook for the dollar, underlining the uncertainty over the direction the world’s reserve currency will take next year.

The consensus among banks is that the dollar will decline in 2019, with much of the weakness expected in the second half of the year as shifts in monetary policy begin to favour other currencies, including the euro. However, that prediction comes as speculative bets on an appreciation in the dollar stand near the highest levels of the year, according to data from the Commodity Futures Trading Commission.

“Most banks and FX strategists think that the dollar is going to go weaker next year, but — interestingly — positioning tells a very different story,” said Andreas Koenig, head of global forex at Amundi Asset Management. “At the moment the market is very long dollar so it’s either the prediction for a weaker greenback that’s wrong or the markets’ positioning. It doesn’t add up.”

The past 12 months have offered a reminder of the dangers in being too confident in forecasting currencies. At the start of this year, the consensus among most investors was that the dollar would continue to weaken — a prediction that came unstuck in April as the clear outperformance of the US economy saw the dollar index, a broad measure of the currency, jump 8 per cent in a matter of months. Its strength hit emerging market economies with current account deficits and lots of dollar-denominated debt, but also offered the European economy some relief via a weaker euro.

As the Federal Reserve persisted in tightening monetary policy, investors rediscovered the appeal of dollar-denominated assets as the attraction of riskier bets, such as in emerging markets, eroded.

Mr Koenig said that being long the dollar and US assets had been “a very popular trade this year” because it was a low-risk asset that also had an attractive yield.

The consensus view for a weaker dollar in 2019 is built on the assumption that weaker growth in the US prompts the Fed to stop raising interest rates, while the European Central Bank continues to withdraw stimulus. Analysts at UBS argue that “we think the dollar is likely to depreciate over time as policy normalisation gets under way in Europe and Japan”.

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