Shorting the dollar proving to be bad bet

It’s a tough time to be holding onto a short position, and not just for equity investors caught out by Reddit-fueled price surges.

In the currency market, one of the big consensus calls for 2021 has had a rough January, with the U.S. dollar defying expectations for it to extend its decline — at least for now. The Bloomberg dollar index, which measures the greenback against a basket of major peers, is up 0.8 percent since the end of 2020 and is on course for only its second monthly gain since the coronavirus pandemic rocked markets back in March.

That may cause some pain for traders betting the other way, although positioning data from the Commodity Futures Trading Commission shows that speculators have so far been largely undeterred, with net short positions on the greenback increasing this month and close to the multiyear high they reached in September. And even with the January rebound, the dollar gauge remains around 13 percent below its peak from March.

A recent Bank of America survey showed that shorting the greenback was the second most popular trade among investors and it’s easy to see why: The rollout of vaccines and the prospect of additional U.S. fiscal stimulus promise to usher in an era of global growth that should buoy risky assets and weigh on the dollar, which is often seen as a haven in times of trouble. But that’s not what’s played out in January and some observers see the recent strength persisting.

“We will have a period where the U.S. outperforms many economies around the world and as a result U.S. rates will move higher,” Brad Bechtel, global head of foreign exchange at Jefferies Financial Group and a self-described “anti-bear,” said in an email Friday. Most importantly, he sees real rates — which take into account the impact of inflation — moving higher and helping to lift the greenback.

The surprise rebound has prompted some strategists to start questioning their calls for a weaker greenback. ING Groep NV’s bearish dollar view for 2021 is predicated on the Federal Reserve keeping policy “very loose” and on a synchronized global recovery that provided “attractive alternatives outside of the U.S,” the firm’s Chris Turner wrote in a Thursday note. But these premises are coming into question.

Fed Chair Jerome Powell said Wednesday that officials were a long way from withdrawing their aggressive support for the economy. However, ING’s dollar call might be due for a review if the central bank applies the brakes sooner than expected amid the vaccine rollout and the prospect of more stimulus.