Hedge funds say greenback rally may not be over

investmentnews.com:

The dollar’s recent strength has confounded naysayers, and according to some hedge funds, the rally isn’t over.

K2 Asset Management says the greenback will continue to charge higher as US interest rates remain elevated while AVM Capital expects rising Treasury yields to boost the currency. Alternative asset manager Clocktower Group sees further gains for the dollar if China’s stimulus continues to disappoint.

“It does look too risky to short the dollar,” said George Boubouras, head of research at K2, who sees the greenback advancing against the Australian dollar and other currencies that are sensitive to risk sentiment. “The higher-for-longer Fed funds rate theme will dominate and markets will start pricing in rate cuts in 2024 a number of times, we believe, unsuccessfully.”

A seven-week rally in the greenback is forcing dollar bears to reassess their wagers, with a string of positive US economic data undermining the case for monetary easing. Hedge funds are among those caught out by the dollar’s strength, as they have been betting against the currency since June. 

The Bloomberg Dollar Spot Index is on track for an eighth consecutive week of gains, which would be the longest ever run of increases in data going back to 2005. Signs that the US economy is headed for a soft landing are bolstering bets that the Fed will keep borrowing costs higher for longer, which would burnish the greenback’s appeal.

That may spell trouble for dollar bears. BNP Paribas Asset Management forecast in July that the currency will remain weak in the coming months while Standard Bank predicted that it will enter “a multi-year downtrend” as the Fed starts to ease.

Swap traders are pricing in 75 basis points of rate cuts from the Fed between January