The Big Dollar Short Is Becoming a Pain Trade for Investors

Forex

Economic

Summary:

The dollar’s rebound is squeezing bearish investors as it hits a two-month high despite the U.S. shutdown. Weak yen and euro, steady U.S. economy, and cautious Fed signals are fueling renewed dollar strength.

Betting against the dollar has been the dominant trade this year in the $9.6 trillion-a-day foreign exchange market, but the wager is starting to stumble.

The world’s primary reserve currency is around a two-month high even as the US government shutdown drags on, and traders in Asia and Europe say hedge funds are adding options bets that the rebound versus most major peers will extend into year-end.

Overseas developments have been a key driver, with the euro and the yen falling abruptly this month. At the same time, comments from Federal Reserve officials urging caution around further interest-rate cuts have boosted the dollar’s appeal.

The longer the strength persists, the more painful it is for those sticking with calls for the greenback to take another leg lower. Among the bears: Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley.

The trend, if it continues, could reverberate across the global economy, for example making it harder for other central banks to ease monetary policy, pushing up the cost of commodities and increasing the burden of foreign borrowings in the currency.

A rapid rebound could derail some of the year’s most favored trades, knocking bullish expectations for emerging-market equities and bonds in the final quarter and also weighing on the shares of American exporters.

Count Ed Al-Hussainy at Columbia Threadneedle among dollar pessimists who have flipped their view. The portfolio manager went short at the end of 2024 when the greenback was still rallying as part of the so-called Trump trade after the US election.

Over the past month and a half he’s trimmed that stance by reducing exposure to emerging markets. For him it boils down to markets leaning too heavily toward Fed rate cuts given the resilience of the American economy.

“We have become a lot more positive on the dollar,” he said. “The markets have priced in a very aggressive series of cuts, and it’s going to be difficult to execute them without a lot more labor-market pain.”

The Big Dollar Short Is Becoming a Pain Trade for Investors_1

The Bloomberg Dollar Spot Index is now up roughly 2% since mid-year, after its steepest first-half slide in decades. It’s gained 1.2% this week, the best performance in 11 months. In early 2025, after President Donald Trump held off on applying across-the-board tariffs once he took office, the greenback slid in part on the view that inflation would be tame enough for the Fed to resume lowering rates.

The slump deepened with his rollout of sweeping levies in April, which fueled worries that foreign investors would sour on the US amid the trade war. There was also speculation that the president favored a weaker dollar, which would help US exporters, on top of his pressure on the Fed to slash rates, all of which amplified the bearish wave.

As it turned out, however, international investors haven’t shunned the US, although there are signs they’ve been buying derivatives to protect against dollar losses. The lure of US equities, led by megacap technology shares, has been too great. And overseas demand at Treasury auctions has been mostly solid.

The latest Commodity Futures Trading Commission data show that hedge funds, asset managers and commodity trading advisers were still short the greenback as of late September. Even though the positions are well below the peak reached at mid-year, that still leaves considerable scope for pain should the dollar continue to appreciate.

Hedge funds ramping up bullish option trades on the dollar into year-end are expressing that view against most Group-of-10 currencies, according to Mukund Daga, global head of currency options at Barclays Bank Plc.

Dollar Advances Toward Key Resistance Levels: Major Techs

There are also signs that options traders are paying more to hedge against the risk of a dollar rally than a decline. A measure of the difference in demand for bullish versus bearish bets shows traders are the most optimistic on the greenback since April. The appetite for dollar-bullish structures has exceeded that for bearish ones every day this week, Depository Trust & Clearing Corp. data show.

The Big Dollar Short Is Becoming a Pain Trade for Investors_2

Where the dollar goes from here, of course, is anybody’s guess. The Fed’s next steps will play a major role.

Traders are pricing in roughly two quarter-point cuts by year-end and more next year. Yet recent commentary — including the minutes of the central bank’s September meeting and remarks from policymakers — suggests the trajectory is far from assured. While there are signs the job market is cooling, inflation remains sticky.

“Markets are now pricing in a full Federal Reserve cutting cycle,” said Mona Mahajan, head of investment strategy at Edward Jones. “They weren’t before, and that helps explain why the dollar has weakened so much, but some mean reversion is to be expected.”

What Bloomberg Strategists say...

“The growing momentum for the greenback is spurring a fresh squeeze for overstretched dollar bears. There seems to be still plenty of money hanging on to bearish dollar positions in the hope that the “sell America” narrative from early 2025 makes a return. If that’s so then further dollar squeezes are on the cards.”

— Garfield Reynolds,MLIV Asia Team Leader.

For the full analysis, click here.

A big complication for currency prognosticators is that the government shutdown has delayed crucial employment figures, though the Bureau of Labor Statistics is said to have recalled staff to prepare a key inflation report. Evidence that labor-market weakness is building could revive the short-dollar trade, and some of the biggest banks on Wall Street still see more dollar losses in the coming months.

Another wrinkle for the dollar could be the so-called debasement trade, as growing fiscal concerns around the biggest economies lead some investors to seek the perceived safety of Bitcoin and precious metals instead of major currencies.

The Big Dollar Short Is Becoming a Pain Trade for Investors_3

“Markets are quite clearly rethinking popular short-USD trades, but further gains may prove harder to sustain unless markets start to price out Fed easing,” wrote ING analysts Chris Turner and Francesco Pesole.

A large part of the dollar downdraft earlier this year came from the view that a brightening outlook for non-US markets would lure investors. But politics in France and Japan have muddied that narrative.

Exchange rates measure relative values, and sentiment toward the yen has soured with the prospect of the likely ascendancy to Japan’s premiership of Sanae Takaichi, the new chief of the nation’s ruling party. Her policies are seen as fueling inflation and debt-funded stimulus, a scenario that pushed the yen to the weakest since February.

In France, meanwhile, President Emmanuel Macron’s government remains in crisis, a fresh weight on the euro, which has dropped to the lowest since August.

Given the situation in France and expectations of looser fiscal and monetary policy in Japan, the rally in the dollar against those two currencies may have legs, said Carol Kong, a strategist at Commonwealth Bank of Australia.

“The fact is, to use one of our old adages, the dollar is relatively the least dirty shirt in the laundry,” said Andrew Brenner, vice chairman at Natalliance Securities in New York. “Don’t expect a major dollar downside with both the yen and euro under pressure.”

Source: Bloomberg

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Michelle

Economic

Forex

The yen stabilised on Friday but was still headed for its steepest weekly drop in a year on Friday, as the chances of a near-term rate hike faded, while the euro was rooted near two-month lows by political crisis in France.

The yen edged up 0.2% to 152.7 per U.S. dollar, still close to its weakest since mid-February and heading for a 3.5% drop in the week, its biggest decline since last October.Its drastic drop has been spurred by concerns that the Bank of Japan may not hike interest rates again this year after fiscal dove Sanae Takaichi's surprise victory to lead the ruling party, stoking worries of Japanese authorities needing to step in to support the yen.Japanese Finance Minister Katsunobu Kato said on Friday that the government was concerned about excessive volatility in the foreign exchange market. Takaichi said on Thursday she did not want to trigger excessive declines in the yen.

"The Ministry of Finance is very sophisticated, they're very experienced, and I think they would use verbal intervention beforehand. And in a way, I think they have," Rabobank chief strategist Jane Foley said.

Takaichi said on Thursday that the BOJ is responsible for setting monetary policy but that any decision it makes must align with the government's goal.

She looked set to become Japan's first female prime minister in a parliament vote that was expected on October 15. But the date will be likely pushed back after the Liberal Democratic Party's junior coalition partner Komeito pulled its support, breaking their 26-year-old alliance.Traders are currently pricing an about 45% chance of a rate hike from the BOJ in the December meeting and are only fully pricing in a 25-basis-point hike in March.

FRENCH DRAMA DENTS EURO

The euro headed for its biggest weekly decline in 11 months, but managed to hold steady at $1.1564, near its lowest for two months. Political turmoil in France has weighed heavily on the single currency in the last week.

President Emmanuel Macron is searching for yet another prime minister, hoping his next pick - the sixth in under two years - can steer a budget through a legislature riven by crisis.

The political paralysis has made it deeply challenging to pass a belt-tightening budget and has made investors increasingly worried about France's yawning deficit, on top of evidence of slowing momentum in other key economic engines such as Germany.

"The data from Germany's not good, and therefore I think that makes the euro a little bit more susceptible to wobbles on the French news," Rabobank's Foley said.

As a result, the dollar index , which measures the U.S. currency against six others, neared two-month highs around 99.39 and headed for a weekly rise of 1.7%, its biggest in a year.

"The recent dollar rally has gone against market positioning and prompted a partial covering of USD shorts," said Chris Weston, head of research at Pepperstone.

"There remains a high degree of scepticism that the USD can materially push through 100, a level in the dollar index that was quickly reversed in May," he said in a note.

With the U.S. government shutdown continuing and little to no economic data for investors to parse through for clues on the path the Federal Reserve is likely to take, markets are keeping an eye on comments from policymakers.

The influential New York Federal Reserve President John Williams signalled on Thursday he would be comfortable with cutting interest rates again, despite some policymakers' qualms about rising inflation that suggest such a decision would not be easily made.

Traders are pricing in a 95% chance that the Federal Reserve cuts rates by 25 bps at its October meeting, while the odds of an additional cut in December have dropped to 80%, from 90%, in the past week, according to the CME Group's FedWatch Tool.

Source: Kitco

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Adam

Commodity

Palladium Futures: buyers reclaim control as key levels shift higher

Quick read for investors and traders: Palladium has flipped from weakness to strength. Price climbed from the $1,410 area and now trades above the VWAP ≈ $1,451, the developing POC ≈ $1,472, and the Value Area High (VAH) ≈ $1,490. The next magnets above are $1,502.5 (yesterday’s closing VWAP) and $1,515 (yesterday’s POC). Our orderFlow Intel read shows a bullish bias with high confidence.

Why this matters

When price rises and the VWAP, POC, and VAH all recalculate higher, it tells us the market is accepting higher prices, not just short-covering. That usually supports continuation until buyers meet serious resistance or fail to defend a retest.

What is orderFlow Intel (in plain English)

Idea: We study how trades are executed at the bid and ask, how volume shifts through time, and how price reacts around key reference points like VWAP, POC, VAH, and round numbers.

What we look for: signs that selling is being absorbed; whether buyers are truly in control or just getting a temporary push; whether pullbacks are being defended.

Benefit: It turns raw tape activity into a decision-support “compass,” helping you judge when a move is likely to continue, pause, or fail—without needing to watch every tick.

Current read and levels

Structure: VWAP is rising; price is holding above it. POC advanced to $1,472; VAH advanced to $1,490.

Upside magnets: $1,502.5 then $1,515. Firm acceptance above this band opens room toward $1,549–$1,585 in a later phase.

Support to monitor: $1,472–$1,451 (POC to VWAP). As long as buyers defend this zone, the short-term uptrend remains intact.

How to use this “map”

Bullish pathway: If price holds above $1,472–$1,451 and reclaims $1,502.5 → $1,515, momentum favors continuation.

Cooling phase: Failure to hold above $1,472 suggests a consolidation; watch VWAP ($1,451) for buyer defense.

Invalidation for short-term bulls: A sustained move back below VWAP with weak responses from buyers would downgrade the outlook.

New to VWAP, POC, VAH

VWAP: the market’s “average price” weighted by volume; above it shows buyers have the advantage; below it shows sellers have it.

POC: the price with the most traded volume; think of it as today’s balance point.

VAH/VAL: the upper and lower edges of the area where most trading occurred; moving above VAH signals acceptance of higher value.

Our stance

Based on orderFlow Intel—investingLive.com’s proprietary methodology—the market shows a bullish bias with high confidence. We will reassess if buyers stop defending $1,472–$1,451.

Source: investinglive

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Warren Takunda

Economic

The UK's largest business survey was released overnight, and it revealed subdued confidence amidst worries over taxes and inflation, raising fears for Britain's economic growth outlook.

Tax and inflation are the top concerns for "bruised" businesses, says the British Chamber of Commerce (BCC) in its 3rd-quarter business survey, finding that only 48% of firms are expecting increased turnover in the next 12 months.

21% expect a decrease.

These are damning findings for the government and point to a worrying loss of altitude for the economy, which will weigh on the pound.

"With the Autumn Budget 2025 in focus, we remain bearish on sterling, due to weakening growth prospects," says a note from analysts at bank J. Safra Sarasin.

Pound Sterling Falls to New 2-month Low_1

Above: A downward sloping trend line has emerged in GBP/EUR. Secure current rates for use at a later date if you are concerned about market direction.

According to the BCC report, most firms "remain bruised, with no improvement to business sentiment."

"The outlook for the UK economy remains blurry," says Marc Cogliatti, Global Capital Markets Director at Validus Risk Management. "There is little reason to be bullish on the pound."

Traders agree: the pound to dollar exchange rate (GBP/USD) has fallen for three days in succession, declining from 1.35 and is at 1.3310 at the time of writing Friday.

This is a new two-month low.

The pound to euro exchange rate (GBP/EUR) rallied to 1.1548 by midweek, but has since topped out and retreated back to 1.15 at the time of writing.

Technical indicators suggest both of the key Sterling currency pairs are prone to further losses in the coming days and weeks.

Pound Sterling Falls to New 2-month Low_2

Above: GBP/USD at a new two-month low.

The BCC survey reveals tax remains the biggest concern for businesses following the employer National Insurance Contributions rise in April; 59% of businesses cite tax as a worry, up from 56% in Q2.

For the Bank of England, there are some striking findings that would suggest a need for caution when considering cutting interest rates again in November as the BCC reports "a sharp rise in concern about inflation."

The survey revealed 57% of firms cite inflation as a concern, up from 52% in Q2, which is the highest level since the start of 2024. This as 29% of firms report a fall in cash flow, while for 46%, cash flow remained the same.

"The Employer NICs increase has been the most widely cited source of pressure, hitting investment and pushing up prices," says David Bharier, Head of Research at the British Chambers of Commerce.

Yet, worries about interest rates remain at relatively low levels, cited by a quarter of responding businesses (25%).

This week we heard Bank of England Chief Economist Huw Pill warn that the Bank must prioritise the fight over inflation above other considerations. His words are given greater weight by these real-world findings from the BCC.

The fingerprints of government policy are all over this loss in confidence, and the budget due for November 26 will likely see taxes ratcheted up once more as the government tries to plug another multi-billion pound black hole.

Pound Sterling Falls to New 2-month Low_3

With the big-ticket taxes of income tax, VAT and National Insurance exempt from tax rises, investors and businesses will inevitably have to take a hit.

Given that investors and business investment are the growth engines of the economy, investment is likely to suffer.

Indeed, the BCC survey reveals the weak confidence amongst businesses is translating into weak investment intentions.

A quarter of businesses say they have cut back on investment plans, and the majority of firms, 54%, say their investment strategy has remained the same, while 21% have increased their plans.

"Persistent weak sentiment this quarter may suggest that many firms have already priced in a tough Budget. But further surprise measures that hit business, like those seen in 2024, could drive confidence even lower," says Bharier.

Source: Poundsterlinglive

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Adam

Economic

The first week of a government shutdown is usually the easy one. It only gets harder after that.

As the standoff between President Donald Trump and Congress stretches into its second week — and with no end in sight — the real-world impacts of the shutdown are starting to rise.

Air travel, taxpayer services and national parks are among the first government functions to feel the strain of a prolonged impasse, and some agencies have implemented a sort of rolling blackout of services to conserve funds and respond only to emergencies.

More than a quarter million federal employees missed scheduled paychecks this week, with another 2 million expected to go without by next week. The Pentagon’s next military payday, Oct. 15, could prove a political flash point if troops begin missing pay for the first time in decades.

Early Pain Points

Air travel is emerging as the most visible strain. Flight delays linked to air-traffic-control staffing shortfalls have hit airports from Dallas to Chicago to Washington, DC.

Transportation Secretary Sean Duffy said staffing shortages usually account for about 5% of delays, as air traffic controllers slow traffic to ensure safety. Now those shortages are the cause of more than half of late flights. The US Travel Association estimates $1 billion in lost spending each week.

Taxpayer services are contracting after the IRS furloughed nearly half its staff when carryover funds ran out. Roughly 34,000 employees were sent home this week, while about 40,000 remain on duty preparing for next year’s filing season and implementing Trump’s new tax law. The Taxpayer Advocate Service has shut down entirely.

Food programs could be next in line. The $8 billion Women, Infants and Children nutrition program is being sustained by a $150 million contingency fund that’s nearly gone. The White House has said tariff revenue will be tapped to keep it afloat, but hasn’t explained how or when those transfers would occur. Supplemental Nutrition Assistance Program benefits — food stamps for 41 million Americans — are funded through the end of October.

Some national parks are open but with bare-bones staffing and limited sanitation services, with the impact varying state by state. Cooperative agreements with state governments can keep some parks open using non-federal funds, but others will be closed completely. Smithsonian museums and the National Zoo will close Oct. 11.

Homeowners in flood-prone areas may find themselves without coverage during hurricane season because of a lapse in the National Flood Insurance Program, which cannot issue new policies or renew expiring ones.

A Dynamic Shutdown

After a 35-day holiday shutdown stretching into 2019, the Government Accountability Office faulted the Trump administration for failing to plan for a prolonged lapse in funding.

Some workers are being furloughed and recalled as needed to balance conflicting mandates. The law forbids agencies from spending money not approved by Congress, but the lack of funding doesn’t always delay legal deadlines or prevent emergencies.

So Justice Department lawyers are furloughed as long as their court cases are on hold — but are being called back in cases where judges are declining continuances. And IRS workers could be called back as the tax filing season nears.

Some agencies were able to get around the Antideficiency Act by using special funds that didn’t expire at the end of last year. But those funds are being quickly depleted.

At the Environmental Protection Agency, some furlough notices went out starting Wednesday night, according to the agency’s largest union. EPA’s contingency plan calls for almost 90% of employees to be furloughed once funds lapse, halting most enforcement and permitting.

More so than during previous shutdowns, the second Trump administration is also rewriting the playbook based on new legal interpretations. The Department of Homeland Security anticipated a prolonged lapse and had plans to bring back almost 1,800 workers for the second week — mostly in top-level management, Coast Guard and Customs and Border Protection.

Economic Fallout

Economists estimate that the shutdown could shave 0.1 to 0.2 percentage points off gross domestic product for each week it continues. The impact is magnified this time because the government’s data flow has largely gone dark.

The Bureau of Labor Statistics postponed last week’s jobs report, but it brought back back staff in order to prepare the latest consumer price index. Other reports at risk of being delayed include retail sales, housing starts and business inventories from the Census Bureau. The Bureau of Economic Analysis has suspended operations in advance of its initial third-quarter GDP estimate for Oct. 30. Without those data, the Federal Reserve and private forecasters are flying blind.

Those official data are particularly important for annual inflation adjustments throughout the federal government, including cost-of-living increases, tax brackets, loan subsidies and cost-benefit analyses of federal programs.

Some of the economic impact could be blunted once the shutdown ends as federal workers get back pay. But Trump has called into question whether all federal workers will be made whole, and has threatened to lay off thousands of federal employees, making the rebound less certain.

Political Pressure Mounts

Historically, the mounting pain for travelers, taxpayers and troops has provided the impetus for Congress to break the stalemate and approve new funding. In 2019, airport chaos forced the White House to cut a deal after 35 days.

This time, Trump and his Republican allies think they have the upper hand. The administration has tried to increase the pain among Democratic constituencies — threatening to fire thousands of federal workers who live and work in Democratic districts — while maintaining funding for key Republican priorities like immigration enforcement.

Those mass layoffs — which the White House said last week would happen in “two days, imminent, very soon” — haven’t materialized. If they do, the downsizing could put added stress on agencies that have already seen staff cuts inspired by Elon Musk’s Department of Government Efficiency initiative earlier this year.

Source: Bloomberg

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Glendon

Economic

Germany said China’s increasing restrictions of exports on minerals critical to the technology industry are of “great concern” and the country must reduce its dependence on supplies from outside of the European economic area.

While it’s too soon to assess the impact of China’s latest curbs, “the issue is now being discussed intensively at both national and EU level,” a spokeswoman for the Economy Ministry said in an emailed response to Bloomberg’s questions.

Europe is caught in the middle of tense trade negotiations between the US and China ahead of a high-stakes meeting this month between Donald Trump and Xi Jinping. Beijing on Thursday unveiled sweeping new restrictions on rare earths, requiring exports of products with even trace amounts of the materials to have a license. China’s move is seen as a reaction to Washington’s export regime, which bans Chinese companies from accessing much of the cutting-edge technology made by the US and its allies.

The German economy ministry is in close contact with the companies affected, and is speaking to the European Commission and other European partners, it said. “The aim is to achieve a coordinated European approach,” the spokeswoman said in the statement. The German government’s goal is to increasingly relocate steps in raw material extraction and processing back to the European economic area, she said.

Source: Bloomberg Europe

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Samantha Luan

Economic

Forex

Political

Singapore's central bank has a unique method of managing monetary policy, tweaking the exchange rate of its dollar instead of changing domestic interest rates like most other economies.The Monetary Authority of Singapore (MAS) sets the path of what it calls the policy band of the Singapore dollar nominal effective exchange rate (S$NEER), thus strengthening or weakening the local currency against those of its main trading partners.

WHY DOES SINGAPORE USE THIS METHOD?

Singapore is a small and trade-reliant economy. Gross exports and imports of goods and services in the city-state are more than three times its gross domestic product (GDP). Meanwhile, almost 40 cents of every Singapore dollar spent domestically is on imports.Given such a setting, the exchange rate has a much stronger influence on inflation than domestic interest rates.For example, if the Singapore dollar appreciates against currencies of major trading partners, it will reduce prices of imported goods and services. This dampens the prices that households have to pay.

WHAT IS THE S$NEER?

The S$NEER is an index made up of bilateral exchange rates between Singapore and its major trading partners.The index is a trade-weighted exchange rate, where weights are assigned to the various currencies of Singapore's major trading partners based on the importance of the trade relationships.The central bank says this allows the Singapore dollar to perform collectively in relation to its major trading partners, which is what matters for general price levels in Singapore.

HOW DOES THE S$NEER POLICY BAND WORK?

MAS does not set the precise level of the exchange rate or control it in real time. Instead, the S$NEER is allowed to move up and down within a policy band, the exact levels of which are not disclosed. If it goes out of this band, the MAS steps in by buying or selling Singapore dollars.The policy band has three parameters that the MAS can adjust. Until 2024, these parameters were reviewed at least twice a year, typically in April and October.Additional reviews can be held if conditions demand an immediate change in settings, such as in 2022 when high inflation triggered two off-cycle moves.

From 2024, the central bank started making monetary policy announcements every quarter instead of semiannually, saying it allowed policymakers to provide their assessment of the economic outlook in a timelier fashion.

The three policy levers are the slope, the level and the width of the band.

Adjusting the slope will influence the pace at which the Singapore dollar strengthens or weakens.Adjusting the level, or mid-point, of the policy band allows for an immediate strengthening or weakening of the S$NEER, making this a tool for drastic situations such as a recession.

By widening the policy band, the MAS can allow for more volatility of the S$NEER.