Dollar Kicks Off Biden Era With Losses as Short Bets Are Back

(Bloomberg) -- Joe Biden’s administration may not be targeting a drop in the U.S. currency, yet his pick for Treasury secretary appears to have started one.

The dollar is heading for a third day of declines, its longest losing streak in a month, as Biden is set to start his presidency on Wednesday. The Bloomberg Dollar Spot Index is edging lower in the wake of Janet Yellen’s nomination testimony on Tuesday, which invoked an enduring era of low interest rates and the need for additional government spending. On Wednesday, the gauge slid as much as -0.3%.

The declines have reversed a rebound in the dollar at the start of the year that 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 Wednesday, led by the Canadian dollar, with sterling touching its highest since May 2018. The greenback is resuming a trend that saw the dollar gauge slide more than 5% last year. Hedge funds 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.

Yellen’s remarks also marked a shift away from the currency policy advanced by the Trump administration, according to a Wednesday note by Brown Brothers Harriman strategists Win Thin and Ilan Solot.

“If nothing else, markets will no longer be subject to tweet-related volatility, and that’s a good thing,” they wrote. “We viewed the recent risk-off dollar bounce with skepticism and fully expect the Blue Wave trades to resume in force after the inauguration.”

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. was touting a drop of up to 20% this year and Morgan Stanley was bracing for a tumble of as much as 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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