Dollar with one more sell-off wave? Interest rates at their peak

Since October 2022, we have witnessed the first wave of the sell-off of the US currency, which has recently intensified again. The USD exchange rate has been in a broad consolidation for some time, so that it accelerates along with it falling CPI inflation and PPI for June, move again. This time, accompanied by a significant positioning of investors for a further decline in the value of the USD through positions on futures contracts.

The dollar may weaken as US interest rates approach a peak and aggressive policy tightening by Federal Reserve is starting to take its toll on the world's largest economy. In addition, the US is to be the first to cut interest rates in the future compared to other central banks of developed economies. According to AllianceBernstein and UBS Asset Management, this will be an opportunity for the yen, kiwi and emerging market currencies such as the Brazilian real to strengthen.

Funds bet on the fall of the USD exchange rate

Hedge funds braced for a weakening US dollar as they began selling the dollar net for the first time since March in July, according to data Commodity Futures Trading Commission compiled by Bloomberg. In other words, the number of shorts exceeded the number of longs. This means that the funds prior to the Fed decision bet on the weakness of the USD.

In this context, investors/speculators bet on which currencies will benefit from a fall in the value of the dollar. The yen is seen as the main beneficiary, with bulls seeing catalysts ranging from US recession fears to narrowing yield spreads to speculation that Bank of Japan may change its ultra-loose policy in the coming months.

USD sell off after Fed pause

However, for the USD sell-off to take place, the Fed would have to pause interest rate hikes tonight. This means that, contrary to earlier announcements, there should be no further rate hike in November. Only in such a scenario is there a chance for greater weakness of the dollar. Are there any chances? According to the futures market, yes, today the Fed may end the cycle. However, according to the Conference Board and earlier statements by the Fed, as well as the weakening base effect, no. According to these arguments and inflation increase in the coming months, the Fed may suggest further hike. So what is the most realistic scenario?

The Fed will probably not take another rate hike off the table after today's and will wait for developments in the fall. Only then will he probably take the November hike off the table at the last possible moment.