Dollar plunges as U.S. inflation data spur crowded trade exodus

NEW YORK, Nov 10 (Reuters) – Investors are moving away from the dollar as weaker-than-expected U.S. consumer prices raise hopes the Federal Reserve may need to tighten monetary policy less than expected in its fight against inflation and reinforce the case of risky assets.

Expectations of rising US interest rates, market volatility and geopolitical uncertainty have propelled the dollar over the past two years to its highest level in two decades against a basket of currencies.

While Thursday’s inflation data alone may not be enough to limit the scope of the Fed’s monetary policy tightening, it gave some investors reassurance that consumer prices may finally have started to fall, prompting them to reduce their long dollar positions and dive into riskier positions. assets such as stocks.

“The weaker-than-expected core CPI figure is behind the sharp decline in the dollar,” said Van Luu, global head of currencies at asset manager Russell Investments.

“With stretched valuation and sentiment…that explains the magnitude of the decline.”

The unwinding of dollar positions has led to dramatic moves in forex markets as investors pull back from trades in the forex market that many believe have become crowded by historical standards.

As of 2:45 p.m. (1945 GMT), the US currency was down 3.1% against the Japanese yen, its biggest one-day drop since June 2016. Against the euro, it was down 1 .5%, its biggest drop since November. 4. Against a basket of currencies, the dollar was down about 2%, on pace with its worst day in nearly seven years.

Meanwhile, stocks rallied, with the S&P 500 and Nasdaq Composite up 4.7% and 6.2% respectively, their biggest one-day gains since April 2020.

Reuters Charts

“The first big downside surprise in US inflation in some time has forced many leveraged trend followers to halt,” said Mike Riddell, senior fixed income portfolio manager at Allianz Global Investors in London. .

“The decline in the US Dollar today is what one would expect given the rally in risk assets, based on correlations to bonds and risk assets over the past several months.”

The consumer price index rose 0.4% in October to match the previous month’s increase, the Labor Department said. Economists polled by Reuters had forecast the CPI to rise 0.6%.

The data sent U.S. Treasury yields tumbling, with the benchmark 10-year index hitting 3.8387%, its lowest level in about a month, narrowing the spreads between U.S. and foreign government debt yields that have strengthened the attraction of the dollar.

Crowded trade

Concerns about a violent reversal in the dollar have grown in recent months as the greenback extended its rally to a two-decade high against a basket of currencies, gaining nearly 20% for the year.

As of November 1, international money market speculators were net short of 77,620 contracts in the Japanese yen, worth $6.54 billion, as well as large bets against the British pound, Australian and Canadian dollars. , according to CFTC data.

“Because positioning imbalances have been around for some time, there is a risk that we could see this period of dollar weakness extend as those still long in dollars are eliminated,” said Bipan Rai, northern official. American FX strategy manager at CIBC Capital Markets.

A weaker dollar would be a relief for U.S. exporters and multinationals, whose balance sheets have been battered by a stronger currency this year, as well as emerging market economies that have borrowed in dollars.

Daniel Wood, portfolio manager in the emerging market debt team at William Blair, raised bets on rising emerging market currencies against the dollar.

“The market is less concerned about tightening financial conditions. So the safe haven status of the dollar is not that important,” he said. “I think it’s a microcosm of what’s going to happen over the next year.”

Yet many investors are hesitant to bet on a sustained dollar reversal. The dollar index has fallen 3% or more three times in the past two years, resuming its upward trend, making some investors cautious about betting on a reversal.

Signs of a pick-up in inflation could quickly undermine the case for further dollar weakness, as could various other factors, including geopolitical or economic uncertainty that send investors back to so-called safe havens.

Jack Ablin, chief investment officer at Cresset Capital, is watching key technical levels, including the Dollar Index’s 200-day moving average for indications that the US currency may be on a longer bearish path – a potential signal of positive sentiment that would advocate increasing equity positions in one’s portfolios.

“If we start to see a real downward trend in the dollar, that to me is an indication that it’s safe to get back into equities,” he said.

Reporting by Saqib Iqbal Ahmed, Laura Matthews; Additional reporting by Dhara Ranasinghe; Editing by Ira Iosebashvili and Richard Chang

Our standards: The Thomson Reuters Trust Principles.

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