(Bloomberg) -- Traders looking to sell the world’s reserve currency are far more common than thought even as the dollar’s dominance rips across markets, according to Morgan Stanley.
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“While dollar bulls are numerous and perhaps most vocal in expressing their views, there seems to be a more ‘silent’ plurality of investors looking to sell the dollar instead,” strategists including David Adams wrote in a note. “Many have dry powder and are waiting for a sign to enter shorts.”
The catalysts may be near: inflation data leading into March may bolster the chance of a Federal Reserve rate cut, while lengthier fiscal negotiations by Congress could disappoint dollar bulls, the team said. The strategists expect a more benign outcome in trade policy, which could also weigh on the dollar, according to the note.
Investors including hedge funds have piled into bullish dollar positions on views President Donald Trump’s policies would smack peer currencies, fuel price pressures and keep US interest rates elevated. That raises the risk of large market swings should the greenback reverse course.
Yet selling the US currency has consistently proven to be a painful trade across the $7.5 trillion-a-day foreign-exchange market in recent months.
The greenback has advanced against virtually every major currency in the past quarter. It has strengthened against currencies like the yuan, Mexican peso and Canadian dollar that have been clobbered by risks of a hike in US tariffs.
Still since Trump’s inauguration, traders have mostly focused what he did on trade and less on what he said, giving rise to a cautious optimism after his first few days brought only threats and not big bazookas on levies he’d promised on the campaign trail.
The dollar — which typically gains from tariff expectations — has weakened 1.3% this week. The Bloomberg Dollar Spot Index fell 0.2% in Asia Friday, after Trump said he would “rather not” have to impose tariffs on China during an interview with Fox News.
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Morgan Stanley recommends shorting the greenback against the euro, yen and sterling in anticipation of a weaker US currency.
“Investors may be far more willing to add dollar shorts sooner and with higher conviction than dollar bulls may anticipate,” wrote the strategists. “For them, it’s more a question of timing rather than direction.”