4 reasons investors expect US dollar to keep sliding

Some 87 per cent of 331 respondents in a Bloomberg survey expect the Federal Reserve to cut interest rates to 3 per cent or below later this year

A large group of investors believe the yen or yuan appreciation will be the primary cause of dollar decline

Reading Time:2 minutes

Professional investors are negative on the dollar, a survey showed. Photo: AFP

Published: 11:55am, 24 Apr 2023Updated: 12:46pm, 24 Apr 2023

Investors see the US dollar sliding even further from last year’s two-decade highs, as the market has underpriced the Federal Reserve’s oncoming policy easing cycle.

Some 87 per cent of 331 respondents expect the Fed to cut interest rates to 3 per cent or below – some significantly so – in a loosening cycle that 40 per cent believe will start this year, according to a weekly Bloomberg News survey. That contrasted with market pricing that puts the implied policy rate around 3.05 per cent in two years.

Correspondingly, investors are negative on the US currency, with bears exceeding bulls by 17 percentage points. Many bears stated that the yield path as priced is too high. Interestingly, the second most popular response is that banking sector stresses will largely be confined to the US, which further implies that the Fed will be forced to be more dovish than global peers.

There’s historical precedent for the Fed cutting sharply without other central banks following suit, namely during the tech bust in the early 2000s and the year leading up to the collapse of Lehman Brothers. In the case of the latter, the Fed cut by 325 basis points between August 2007 and April 2008, while the European Central Bank hiked by 25 basis points in July 2008.

Traders monitor news on the Federal Reserve hiking interest rates on March 22. Photo: AP Photo

But dollar pessimism is not purely a product of US problems. A surprisingly large cohort of investors believe that either yen or yuan appreciation will be the primary cause of dollar decline.

Kazuo Ueda, the new Bank of Japan (BOJ) governor, has so far done his best to be as boring as possible, offering little hope to those betting on an end to the super-loose policy that has driven yen weakness.

Select Voice

Choose your listening speed

Get through articles 2x faster

1.25x

250 WPM

Slow

Average

Fast

00:0000:00

1.25x