Hedge funds are adopting a bearish stance on the dollar, aligning with Goldman Sachs Group’s forecast of a weakened dollar following the US central bank’s indication of imminent interest-rate cuts. In response to the Federal Reserve’s clear signals, Goldman Sachs made significant adjustments to its exchange-rate predictions, reflecting a quicker shift toward “non-recessionary” interest-rate cuts, as highlighted by analysts, including Michael Cahill, in a note released on Friday. Notably, hedge funds and other major speculators have, for the first time since September, switched to a net short position against the dollar as of December 12, according to data from the Commodity Futures Trading Commission.
The Bloomberg Dollar Spot Index experienced a 1.2% decline last week, reaching a four-month low after the Fed’s decision to maintain interest rates and project a potential 75 basis points of reductions in 2024. This prompted markets to quickly factor in as many as six cuts, with Goldman’s economists now anticipating five.
Goldman’s analysts emphasized the incorporation of more dollar weakness into their new forecasts, particularly affecting rate-sensitive currencies that would have faced challenges under a ‘higher for longer’ rates regime. This impact is notably observed in currencies such as the yen, the Swedish krona, and the Indonesian rupiah, according to the analysts.
CFTC data reveals a significant shift in the combined position for bets across major currencies, now at a net 26,355 contracts bearish on the dollar as of the week ending last Tuesday. Key adjustments include a decrease of over 20% in bets on dollar gains versus the Japanese yen and nearly doubling wagers on dollar declines against the British pound.
The yen exhibited a 2% surge against the dollar last week, while the krona recorded a 1.9% increase—marking the most substantial gains among G-10 currencies outside of Norway’s krone, which rose over 4% following its central bank’s unexpected increase in the key deposit rate.
Goldman’s outlook anticipates the yen to remain relatively unchanged at 142 per dollar in six months, a considerable strengthening compared to its previous estimate of 155. Additionally, projections for the Australian and New Zealand dollars have been raised by at least 9% over the same period.
The Goldman strategists see potential for further gains from current levels in pro-cyclical currencies benefiting from the Fed’s easing of financial conditions, making a case for a soft landing. Notable currencies in this category include the British pound, the South Korean won, and the South African rand.
