(Bloomberg) — Traders looking to sell the world’s reserve currency are far more common than thought even as the dollar’s dominance rips across markets, according to Morgan Stanley.
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“While dollar bulls are numerous and perhaps most vocal in expressing their views, there seems to be a more ‘silent’ plurality of investors looking to sell the dollar instead,” strategists including David Adams wrote in a note. “Many have dry powder and are waiting for a sign to enter shorts.”
The catalysts may be near: inflation data leading into March may bolster the chance of a Federal Reserve rate cut, while lengthier fiscal negotiations by Congress could disappoint dollar bulls, the team said. The strategists expect a more benign outcome in trade policy, which could also weigh on the dollar, according to the note.
Morgan Stanley’s forecast for the greenback is one of the most bearish among strategists surveyed by Bloomberg. Adams sees the US Dollar Index sliding to 105 by the end of the first quarter and 101 by year-end, compared with the median forecasts of 108.7 and 106.9.
Investors including hedge funds have piled into bullish dollar positions on views President Donald Trump’s policies would smack peer currencies, fuel price pressures and keep US interest rates elevated. That raises the risk of large market swings should the greenback reverse course.
“There is quite a lot of dollar-positive risk premium in the market that has scope to unwind,” Adams said in an interview.
He recommends shorting the greenback against the euro, yen and sterling in anticipation of a weaker US currency. Adams forecasts EUR/USD at 1.06, USD/JPY at 140 and GBP/USD at 1.28 by the end of the first quarter.
Yet selling the US currency has consistently proven to be a painful trade across the $7.5 trillion-a-day foreign-exchange market in recent months.
The greenback has advanced against virtually every major currency in the past quarter. It has strengthened against currencies like the yuan, Mexican peso and Canadian dollar that have been clobbered by risks of a hike in US tariffs.
Still since Trump’s inauguration, traders have mostly focused what he did on trade and less on what he said, giving rise to a cautious optimism after his first few days brought only threats and not big bazookas on levies he’d promised on the campaign trail.
