Hedge Funds Shift to Bearish Territory on the US Dollar: World’s Reserve Currency Slump May Persist Even Longer

For the first time in over two years, hedge funds have become pessimistic about the US dollar, suggesting that the world’s reserve currency may be dethroned for longer than originally anticipated.

The coronavirus pandemic forced the Federal Reserve to unleash a series of policy objectives aimed at propping up the US economy, and most importantly, the promise of unlimited liquidity. Interest rates fell to near-zero levels, and of course, the fear of impeding inflation set in. The central bank’s excessive asset purchases caused inflation-adjusted 10-year yields to drop to record-low levels, which in turn made investors less attracted to US assets.

As a result, leveraged funds that held options and net futures positions against eight other currencies declined to -7,881 contracts in the previous week, according to aggregated data compiled by the Commodity Futures Trading Commission. A Federal Reserve index which measures the strength of the US dollar was at an all-time high back in March during the height of the pandemic, as many investors flocked to safe haven assets in response to increased market volatility. Now that is appearing that other economies have been coping significantly better with the coronavirus pandemic, that index fell approximately 7%.

According to Deutsche Bank chief international strategist Alan Ruskin, the current weakening of the US dollar may be here to stay for a prolonged period of time. The Federal Reserve has expressed it plans to maintain the current trend of interest rates for the foreseeable future, which when coupled with the approaching US election, will continue to have a downward pressure on a dollar recovery. Ruskin states that policies in times of crisis, such as the coronavirus pandemic, do not end up being as effective as anticipated, nor do they heed the type of growth necessary for a swift economic rebound. As a result, it is very unclear when confidence in the US dollar relative to other currencies will rebound.

Information for this briefing was found via the Federal Reserve and Bloomberg. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.