TLDR:
- Currency traders are avoiding dollar trades due to US election uncertainty
- Cross-currency pairs are gaining popularity as alternatives
- Long-term investor positioning in the dollar is the most neutral in 2.5 years
- The Federal Reserve’s interest rate decisions are adding to dollar uncertainty
- Markets are waiting for more US labor data for clarity on the Fed’s rate path
Currency traders are increasingly looking for alternatives to dollar-based trades as uncertainty surrounding the upcoming US presidential election and Federal Reserve policy decisions continues to grow.
This shift in strategy reflects a cautious approach by investors who are finding it challenging to predict the dollar’s trajectory in the current economic and political climate.
The US dollar typically dominates the foreign exchange market, accounting for one side of 88% of all trades in the $7.5 trillion-a-day market, according to the Bank for International Settlement.
However, the combination of an uncertain election outcome and debates over the pace of interest rate cuts by the Federal Reserve has made many traders hesitant to take strong positions on the greenback.
As a result, investors are increasingly favoring cross-currency trades that do not involve the dollar. These include shorting the Swiss franc against the Japanese yen and buying the British pound against the New Zealand dollar.
Such strategies allow traders to profit regardless of how US events impact the dollar’s value.
The shift away from dollar-centric trades is evident in long-term investor positioning, which is currently at its most neutral level in two and a half years, according to data from State Street Global Markets. This custodial bank oversees more than $44 trillion in assets, providing a significant indicator of market sentiment.
Major financial institutions, including Wells Fargo & Co., RBC, Allspring Global Investments, and State Street Global Advisors, are postponing substantial dollar bets until later in the year. They cite political uncertainty as a key factor in their decision-making process. While some speculative market players, such as hedge funds, have recently increased their bets against the dollar, their positioning is not as extreme as it was earlier in the month.
The upcoming US presidential election is a major source of uncertainty for currency traders. With Vice President Kamala Harris only narrowly leading Donald Trump in the polls, there is little consensus on how the election outcome might affect the dollar. This lack of clarity is causing many investors to adopt a wait-and-see approach.
Adding to the complexity is the Federal Reserve’s monetary policy outlook. The central bank is currently debating the pace of interest rate cuts, and markets are closely watching for signs of future policy directions. The next round of US labor market data, expected this Friday, is highly anticipated as it could provide insights into the Fed’s next moves.
Since early August, Bloomberg’s dollar index has fallen approximately 3%. This decline followed a weak non-farm payroll report that suggested the Federal Reserve might begin cutting interest rates in September. Markets are now speculating about the possibility of a second half-point reduction in November, pending further economic data.
Some market participants are considering specific trades based on potential election outcomes. For instance, there is speculation that a second Trump administration could lead to increased tensions between the US and its major trading partners, including Mexico and China. As a result, some traders are buying dollars against the Mexican peso and Chinese yuan as a way to position for this scenario.
However, many investors are choosing to avoid direct dollar exposure altogether until after the November election. Aaron Hurd, a portfolio manager at State Street Global Advisors, suggests that the dollar could potentially fall “much lower” once markets have more clarity on both the election results and economic growth prospects.
