Funds Start Trump 2.0 Era Most Bullish on Dollar Since 2016

  • As Donald Trump begins his second term as U.S. president, currency speculators are giving the dollar their strongest backing since before he was first given keys to the White House.
  • The question now, is whether this signals more USD strength ahead or marks the peak of the current cycle for the "mighty dollar", as Trump referred to the greenback late last year. The bullish dollar trade has had a remarkable run since late September when investors began betting on a stronger U.S. economy, 'higher for longer' U.S. interest rates, and a Trump victory.
  • In the three and a half months since then, Commodity Futures Trading Commission funds have flipped a leveraged net short1 dollar position against major and key emerging market currencies worth around $15Bn to a leveraged net long position worth over $35Bn. That's the biggest 'long' since January 2016.
  • At the same time, the dollar index, a measure of the dollar's value against its G10 peers, rose 10% to its highest level in more than two years, posting multi-year peaks against sterling and the Canadian dollar as well as record highs against emerging market currencies like the Brazilian real and Indian rupee.
  • As the 'Trump 2.0' era begins, the dollar index is some 20% higher than its average over the past quarter of a century and at levels rarely seen since the 1980s. As Societe Generale's Kit Juckes notes, the dollar might be "mighty" but may also be "getting a little bit ahead of itself."
  • Analysts at Morgan Stanley agree, announcing on Friday that they were turning bearish on the dollar and recommend selling it against the euro, sterling, and yen. They argue that most of the economic fundamentals and dynamics that have strengthened the dollar recently – and there have been many - are fully priced into the dollar's exchange rate or even over-priced in some cases.

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1A long position is essentially a bet that an asset will rise in value, and a short position is a wager its price will fall.

(Source: Reuters)