Dollar Traders Prep for More Losses After 1.5% Slide in Currency

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Dollar Traders Prep for More Losses After 1.5% Slide in Currency.

foreign exchange :: 1day ago :: source - bloomberg

By Vassilis Karamanis, Naomi Tajitsu and Masaki Kondo

(Bloomberg) -- Traders are bracing for more dollar weakness after President Donald Trump’s sweeping trade tariffs weakened the US currency by the most in two and a half years.

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Investors are bearish on the dollar in the coming month for the first time since September, options data show. The Bloomberg Dollar Spot Index fell as much as 1.5% on Thursday and the greenback tumbled against all G-10 currencies, sinking around 2% against the yen and Swiss franc. It fell more than 1% versus the euro and the pound, and dropped to its weakest against the Canadian dollar since mid-December.

“The dollar has been the big loser of last night’s events,” said Sonja Marten, head of FX and monetary policy research at DZ Bank AB in Frankfurt, in an interview with Bloomberg TV. “People are now focusing on the economic fallout these tariffs can have on the US itself.”

The harsher-than-expected tariffs threaten to raise prices on trillions of dollars in goods imported into the US each year. For now, investors are betting the levies will put the brakes on the American economy, rather than reigniting inflation, and that’s fueling bets on deeper interest-rate cuts from the Federal Reserve — adding to the depreciation pressure on the greenback.

Hedge funds have increased bearish bets on the dollar, mainly versus the yen and the euro, while also predicting higher volatility into year-end, according to currency traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly.

“The market is betting against the Fed here, saying that weaker US growth — especially if accompanied by an uptick in unemployment — will triumph over the tariff-related inflation uplift,” said Ray Attrill, head of foreign-exchange strategy at National Australia Bank Ltd.

Overnight-indexed swaps signaled an 80% chance of Fed rate cuts by June, up from 76% on Wednesday. The 10-year Treasury yield fell close to 4%.

If the decline in US yields is sustained, “there is plenty more US dollar downside to come in coming months,” Attrill added.

Inflation Threat

At the same time, the threat of faster inflation hasn’t gone away, according to Erik Nelson, macro strategist at Wells Fargo.

“This is not as simple as ‘US growth will be weaker, the Fed will cut more, sell the dollar,”’ he said, adding that the central bank’s response in the coming days will be critical for the dollar’s path.

“If the Fed leans more into the growth side of its mandate, the euro can keep rising against the dollar, but if inflation concerns come to the fore, the dollar selloff will stop dead in its tracks.”

For now, he’s recommending a long position on the euro versus the dollar and the pound.

Credibility Questions

Trump announced Wednesday he will apply a tariff of at least 10% on all exporters to the US, with even higher duties on some 60 nations to counter large trade imbalances with the US. Canada said it will fight tariffs with counter-measures while China and EU have also vowed to retaliate.

“The US administration’s approach to calculating the tariffs raises serious concerns about policy credibility” and undermines the dollar, strategists at Deutsche Bank AG ncluding George Saravelos wrote in a note.

--With assistance from Aline Oyamada, Catherine Bosley and Kriti Gupta.

(Updates with moves, chart and analyst comment.)