Long Positions in the U.S. Dollar: A Crowded Trade

According to a recent survey conducted by the Bank of America, long positions in the U.S. dollar are now considered the most crowded trade. The survey gathered insights from 67 fund managers managing a total of $997 billion assets under management from various regions including the United States, United Kingdom, Continental Europe, and Asia.

Fund managers' concerns regarding interest rates in September seem to have shifted from earlier in August. The response from the survey suggests that these managers are becoming increasingly worried about the future of interest rates.

Sadly, this latest survey poses some challenges for the U.S. dollar, which has seen a significant correction in its equity rally this year and an increase in bond yields. Consequently, it is likely that the U.S. dollar is near its peak according to the bank's strategists.

The ICE U.S. Dollar Index (DXY), responsible for measuring the strength of the greenback against a basket of rivals, has declined slightly from its highest close in 11 months at 107, as recorded on Oct. 3.

While there are several factors supporting further strength in the dollar, including strong economic data in the U.S. and a relatively more hawkish Federal Reserve compared to other major central banks, the potential for a hard landing in the U.S. economy remains a significant downside risk. In such a scenario, it is anticipated that the Federal Reserve would need to implement policy interest rate cuts.

Interestingly, respondents of the survey believe that rate cuts are currently undervalued and that the Federal Reserve is likely to implement the most significant rate cuts among major central banks. This perception diminishes faith in the strength of the U.S. dollar and raises concerns about vulnerability for USD longs.

In conclusion, while long positions in the U.S. dollar remain popular, recent survey results indicate that this trade may be becoming overcrowded. It is essential to closely monitor the changing narrative and potential risks in order to make informed decisions regarding the future of the dollar.