(Bloomberg) -- Joe Biden’s administration may not be targeting a drop in the U.S. currency, yet his pick for Treasury secretary has just started one.
The dollar is heading for its longest losing streak in a month as Biden is set to start his presidency on Wednesday. The Bloomberg Dollar Spot Index has fallen every day this week, as Janet Yellen’s testimony to the Senate invoked an enduring era of low interest rates and the need for giant spending.
That has reversed a rebound in the dollar at the start of the year, which was making many investors nervous given shorting the currency was one of the most popular trades for 2021. Markets have taken Yellen’s comments as a green light to bet against the dollar again.
“Although the Biden administration may not specifically seek a weaker dollar, further depreciation is likely,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, citing a dovish Federal Reserve, more fiscal stimulus and investors unwinding exposure to U.S. assets accumulated over the last decade. “We expect pro-cyclical currencies like the euro, commodity-producer currencies and the British pound to benefit.”
Those currencies were among the biggest gainers on Wednesday, led by the Australian dollar, with sterling touching its highest since May 2018. That resumed a trend that saw the dollar gauge slide more than 5% last year. Hedge funds already boosted net dollar short positions to the highest in nearly three years in the week to Jan. 12, according to data from the Commodity Futures Trading Commission.
Funds that bought the dollar as it rebounded in the last couple of weeks were doing more of a rebalancing exercise rather than taking a real shift in view, according to traders in Europe.
The rush to bet against the dollar had been looking overcrowded last month at a time when Citigroup Inc (NYSE:C). was touting a drop of up to 20% this year and Morgan Stanley (NYSE:MS) was bracing for a tumble of up to 10%. Contrarians see prospects for more spending and distribution of vaccines as helping to buoy U.S. growth prospects and ultimately boosting the greenback.
“It has been a tricky start to the year for Group-of-10 FX, as the favored trades have not performed,” said Stephen Innes, a strategist at Axi. “But with Yellen putting a convincing and staunch dovish footprint on markets by supporting maximum policy overdrive, it should encourage more U.S. dollar shorts on the view that monetary and fiscal policy are singing from the same hymn sheet.”
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