admin With growing uncertainty surrounding the US dollar’s trajectory, investors are increasingly exploring strategies that avoid directly involving the world’s reserve currency. In recent weeks, there’s been a notable shift toward cross-currency trading opportunities, where investors are seeking gains that aren’t solely tied to the performance of the dollar.
Favouring Cross-Currency Trades Amid Dollar Ambiguity
Market experts indicate that the unpredictable nature of the upcoming US elections and Federal Reserve policies has made forecasting the dollar’s movement challenging. Elsa Lignos of RBC Capital Markets noted that many investors are looking to reduce their exposure to the dollar, instead favouring cross-currency trades that can bypass the current uncertainties. This approach offers a way to profit without directly depending on the greenback’s direction.
In the foreign exchange market, which typically sees the dollar involved in 88% of trades, this shift represents a significant change in strategy. With the Federal Reserve contemplating interest rate cuts and election results on the horizon, investors are cautious about taking strong positions on the dollar’s future. State Street Global Markets reports that long-term positioning in the dollar is currently at its most neutral in two and a half years.
Political Uncertainty and Central Bank Divergence Drive Decisions
Prominent financial institutions like Wells Fargo, RBC, Allspring Global Investments, and State Street Global Advisors are delaying major bets on the dollar until after the election, citing the political uncertainty as a significant factor. While speculative investors, such as hedge funds, have increased their positions against the dollar recently, they are not as aggressive as they were earlier this month.
Instead of focusing on the dollar, traders are leaning into cross-currency opportunities. RBC is recommending shorting the Swiss franc against the Japanese yen, leveraging central bank policy differences. Allspring is betting on a weaker euro against the Norwegian krone, and money managers at State Street are waiting for post-election clarity before taking any significant stance on the dollar.
Amid this landscape, strategists from JPMorgan and Nomura remain cautious, emphasising the need for clearer US labour market data before taking a definitive view on the dollar’s direction. Their cautious stance reflects broader concerns about upcoming US economic indicators and election outcomes, prompting many investors to seek safer opportunities outside of direct dollar trades.
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