Massive USD Selloff: Who’s Set to Gain?

US Dollar Selloff Accelerates as Hedge Funds Turn Net Sellers

Dollar weakness remains the central theme in the forex market, a situation fueled by hedge funds turning net sellers for the first time since March. The currency has shed more than 14% since it peaked above the 114 level against the basket of other major currencies last year.  The index breaking through the 100 barrier level and slumping to 15-month lows underscores the increased selloff as other major currencies turn bullish.

Greenback Selloff

The prolonged slump that began late last year has been exacerbated by the US Federal Reserve turning dovish after aggressive monetary policy tightening. The dollar rallied on the Fed hiking interest rate at the fastest pace in history in the race to bring inflationary pressures below the 2% level. With the central bank appearing to have hit the end of the interest rate hike cycle, the dollar remains under immense pressure as other major currencies gain.

The easing of inflationary pressure in the US has eased the prospect of the Fed hiking interest rates. With the prospects of rate cuts becoming increasingly clear, the dollar looks set to be on the back foot in the foreseeable future. Brad Gibson, a co-head of Asia Pacific fixed income at AB, believes the dollar has peaked, and there is room for other currencies to perform better in the second half of the year.

Yen and Emerging Currencies Opportunity

Amid the prevailing dollar weakness, investors are increasingly lining up bets on currencies likely to gain from the greenback weakness. Focus has since shifted to other currencies, with the Japanese Yen and the Australian Dollar turning bullish amid the dollar’s weakness. Analysts at AllianceBernstein and UBS Asset Management believe it is time for other currencies, especially from emerging markets, to recoup some of the losses incurred as the dollar strengthened across the board.

The Yen has turned bullish in recent days plunging below the 140 barrier against the dollar on expectations that it will benefit amid growing fears of a US recession. Speculations that the Bank of Japan might tweak its ultra-loose policy have also helped strengthen its course against the greenback.

Emerging currencies are also on the front foot against the dollar, with an MSCI gauge for such currencies gaining 2% year to date after slumping by more than 4% last year. The gains are expected to continue, especially on the dollar index tanking below the 100-level barrier.

According to UBS Asset analyst Shamalia Khan some of the emerging countries’ currencies to watch include Brazil, Mexico and Chile. The Latin American currencies have strengthened against the dollar, with the Colombian Peso gaining more than 18% against the greenback.

US Economy Resilience

However, there are analysts that hold a contrary opinion insisting that the US dollar weakness may be curtailed.  Brendan Murphy Money, a manager at Insight Investment, believes a US economy that appears resilient on many fronts could help curtail dollar losses.

The fact that there are growth concerns in other parts of the world should continue to make the dollar attractive. The dollar has always performed better and strengthened in times of economic growth concerns as a safe haven.

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