The US dollar is down against almost everything this year, with the Indian rupiah as a rare exception. International stock markets have also outperformed the US and it’s all a result of the tariff war, growing US deficits and the Fed’s inflation fight.
It was a good trade, but is it over now?
There are some warning signs. First, Goldman Sachs data (which dates back to 2014) shows dollar short positioning has only been more short once in history.
For what it’s worth, that drop in 2018 coincided with a fall in the Dollar Index to 88.25. A year later it was at 96.15.
Here is how Goldman Sachs describes the fall in the dollar:
In our view, this reflects a sharp shift in investor outlooks following a period of sustained US asset outperformance and Dollar strength that combined to substantially increase the weight of Dollar assets in global portfolios. The recent drawdown has been particularly steep, which is typical currency behaviour following a peak and, despite some declines has kept FX volatility elevated relative to other asset classes.
While Goldman Sachs data only goes back to 2014, the fund manager survey from Bank of America goes to 2004 and it shows US dollar positions at the most-underweight in 20 years.
For what it’s worth, back in 2005 the US dollar did indeed fall precipitously before bottoming early in the financial crisis.
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