According to a recent survey by Bloomberg's Markets Live team, professional investors believe that the US dollar will continue to slide due to the Federal Reserve's oncoming easing cycle. A significant 87% of the 331 survey respondents predict that the Fed will cut interest rates to 3% or below in a loosening cycle that 40% believe will begin this year. This view contrasts with market pricing that puts the implied policy rate around 3.05% in two years.
Investors are also bearish on the dollar, with a 17 percentage-point gap between bears and bulls. Many explicitly state that they are bearish because the yield path as priced is too high. 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.
While this view may appear strange, there is historical precedent for the Fed cutting rates sharply without other central banks following suit. For example, during the tech bust in the early 2000s and the year leading up to the collapse of Lehman Brothers, US monetary policy diverged radically from global peers. In the case of the latter, the Fed cut by 325 basis points between August 2007 and April 2008, while the European Central Bank infamously hiked by 25 basis points in July 2008, and the dollar was very weak during this pre-Lehman period.
The 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 the dollar decline. However, some investors are dollar bulls, particularly among the retail community. A clear majority of those greenback lovers believe that the Fed rate path is underpriced, confirming that getting the currency direction correct will ultimately boil down to nailing the policy call.
Investors are also giving serious consideration to the risk of a more generalized pivot away from the greenback. A majority of respondents see the dollar making up less thanhalf of global reserves within a decade.
It is worth noting that the risk of a debt-ceiling debacle is not mentioned much in the survey. However, the current political environment is extremely acrimonious, and risks are as high as they have been for many years. The showdown of 2011 is the best template to judge the likely market response to a serious mishap. Back then, yields fell significantly, yet the dollar rallied during this period as risk aversion dominated investors’ thoughts.
In summary, the majority of professional investors expect the US dollar to continue to slide, while some retail investors are bullish on the currency. Investors are also giving serious consideration to the risk of a more generalized pivot away from the greenback, and the risk of a debt-ceiling debacle is not being talked about much in the survey.
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