NEW YORK (Reuters) - There is a lot of uncertainty in financial markets, but there is one bet that almost everyone seems to be making: sell the dollar.
The U.S. dollar fell again on Friday against a basket of six major currencies .DXY, hitting levels not seen in that index's 30-year plus history. It has fallen more than 7.0 percent since the summer's financial ruckus started.
It is an unusually strong consensus, which is often an indicator to go the other way, but, well, there is a lot not to like.
The U.S. economy is likely to slow, if not contract, hurt by a deflating housing bubble, an excess of debt and a financial system that is hitting the lending brakes hard.
And while the Federal Reserve seemed to signal that this week’s cut in rates might be the last for a while, if anything U.S. interest rates may decline faster and farther than those of most other major currencies, undermining support for the greenback even more.
This may be especially true if you believe, as do a vocal minority of analysts, that the U.S. will slide into recession, forcing the Fed to cut rates aggressively.
Others fear the reverse, that rising prices of energy, and the new phenomenon of inflation in China driving up prices at Wal-Mart, will drive up U.S. inflation, tying the Fed’s hands and causing an unattractive mix of low growth and inflation, or stagflation.
In short, a lot of people doing the same thing for a lot of different reasons.
“In all the years I’ve been trading I’ve never seen such a one-sided position against the dollar,” said Dennis Gartman, publisher of the Gartman letter, speaking at a Euromoney foreign exchange conference in New York on Thursday.
“It is absolutely shocking how overtly bearish the world is.”
He also reports that classic sign of a market mania, a variation of the shoeshine boy giving stock tips, saying that a doctor had told him on the golf course that he’d opened an account in order to short the dollar.
Friday’s U.S. jobs figure, showing 166,000 jobs created in October, double the expected figure, was a good example of how the dollar just can’t catch a breeze.
Rather than rising on the data, which would seem to point to a more robust economy and higher interest rates, the dollar rose only briefly before hitting another record low against the euro.
Analysts said this was because reassuring data about the U.S. economy gave investors courage to put on risky trades, but nonetheless we end up with good economic news about the dollar driving the dollar lower.
And indeed if we are in a world where the U.S. economy is not falling apart, there are still better bets for growth and higher interest rates to be had in many emerging and commodity producing countries.
PAIN INDEX AT LIFETIME HIGH
Merrill Lynch calculates what it calls the PAIN Index, which correlates fund performance with currency moves, thereby giving insight into how investors are positioned on various currencies.
What Merrill’s index shows, according to Steven Englander, head of G10 FX strategy, is that there is a remarkably strong bet against the dollar, the biggest in the year and a half the bank has been doing the calculations.
“The market is shorter dollars than at any time, against just about everything but yen” he said.
“People have gotten very short dollars, very quickly.”
Nouriel Roubini, an economist and chairman of RGE Monitor, said he sees the dollar as sharply lower on a trade weighted basis in a year’s time, expecting a fall of at least ten percent, accompanied by a Fed Funds rate of 3 percent, “if not below,” as against 4.5 percent now.
“This is the worst housing recession in U.S history,” he said, speaking at the same event.
“Excess supply of homes is like we have never seen it before.”
Gartman too agreed that the U.S. economy may be heading for the rocks, if not already upon them. He thinks that the oversupply of housing will push the country into contraction and force the Federal Reserve to cut dramatically, perhaps to 2.5 percent or 3.0 in a year.
And even though he thinks the medium term direction of the dollar will be down, he thinks the sheer weight of people all betting the same way opens up the possibility of a vicious short covering rally, as the herd all get caught trying to get out of positions at the same time if sentiment against the dollar changes, even slightly.
“The public is always taken out behind the shed and given a good solid thumping.”
James Saft is a Reuters columnist. The opinions expressed are his own. At the time of publication Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. Email: firstname.lastname@example.org
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