The Tell: Long U.S. dollar now seen as the most crowded trade, but bodes ill for the greenback

Long positions in the U.S. dollar is now considered the most crowded trade, according to a survey conducted by the Bank of America with global fund managers, but the greenback is likely near a peak, the bank said.

The bank surveyed 67 fund managers managing $997 billion assets under management from the United States, United Kingdom, Continental Europe and Asia from October 6 to 11.

The response represents a shift from early August as fund managers surveyed became more concerned about interest rates in September, according to the Bank of America note. 

The latest survey bodes ill for the U.S. dollar
as the equity rally this year has partially corrected and bond yields risen, after earlier making it to the most crowded trade, according to the bank’s strategists. 

“We believe USD is near the peak, further strength requires a change in narrative,” the strategists wrote. 

The ICE U.S. Dollar Index
which measures the greenback’s strength against a basket of rivals, has slightly pulled back from its highest close in 11 months at 107 reached on Oct. 3, according to FactSet data. The index is mostly flat on Friday at around 106.6.

Strong economic data in the U.S. coupled with a relatively more hawkish Federal Reserve than other major central banks, could be the most likely reason to support further strength in the dollar, according to the fund managers surveyed.

BofA Global Research

Meanwhile, the biggest downside risk to the greenback is if the U.S. economy sees a hard landing which will prompt the Federal Reserve to cut its policy interest rates. 

BofA Global Research

Respondents of the survey think that rate cuts are currently underpriced, and they think the Fed is likely to cut rates the most among major central banks. 

“This should erode faith in USD strength, and suggests that USD longs may indeed be vulnerable,” the strategists noted. 


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