(Bloomberg) — The US dollar is headed for its first monthly loss since December as easing inflation pressures strengthen expectations that the Federal Reserve will start dialing back interest rates before the year ends.
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The Bloomberg Dollar Spot Index has fallen over 1% in May, with the currency losing ground against all of its major counterparts. Even the yen, which declined for four straight months, climbed in May thanks to a record $62 billion intervention by the Japanese authorities.
The dollar’s about-face came after Fed Chair Jerome Powell waved off worries that the central bank may raise interest rates again, while a slightly smaller-than-expected rise in the consumer price index eased inflation fears. That marked a break from much of this year, when the dollar rose along with US bond yields as rate-cut bets were priced out of the market.
“Somewhat weaker US data, although from very strong levels, have reassured markets that the economy is not accelerating,” Athanasios Vamvakidis and Claudio Piron, foreign-exchange strategists at Bank of America wrote. “Fed speakers pushing against any expectations for another hike and emphasizing that a cut is the next move, despite taking longer than they had expected, also helped.”
The dollar’s strength has been driven by the gap between interest rates in the US and other developed economies, with the Fed keeping its benchmark at a more than two-decade high. This year, traders aggressively dialed back expectations for rate cuts from the Fed and now anticipate one quarter-point reduction this year.
The Bloomberg dollar index fell as much as 0.3% on Friday after Fed’s preferred measure of underlying US inflation moderated in April.
“The Fed needs to see further improvement in inflation before considering cuts,” said Vassili Serebriakov, FX and macro strategist, UBS Securities LLC. “September appears the earliest they could start but there is plenty of data to come before that.”
He said he prefers buying the dollar on the dips, especially against the currencies like the Swiss franc and the yen, given that interest rates are lower in those countries.
The dollar’s pullback has been accompanied by a drop in bullish wagers on the currency, according to Commodity Futures Trading Commission data.
At one point in April, speculative traders held more than $32 billion worth of derivatives betting that the dollar would rise, the most in nearly five years. Those long dollar bets were cut for four straight weeks through May 21 to around $18 billion.
Chief among the beneficiaries in the positioning shake-up has been the euro, on which traders now hold some $5.6 billion in long bets. The common currency has found a “renewed speculative bid” among traders, Shaun Osborne, Scotiabank’s head of foreign-exchange strategy, wrote in a May note.
–With assistance from George Lei.
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