Fed considers pausing rate cuts
Investors such as pension funds, insurance companies and mutual funds halved their net short positions in the greenback to $2.05 billion as of Dec. 3, the lowest since April 2017, according to data from the U.S. Commodity Futures Trading Commission compiled by Bloomberg. Meanwhile, hedge funds increased their long positions in the greenback by 9.3 percent, maintaining a positive view on the currency since October.
Bloomberg’s dollar index has risen about 5% since hitting an eight-month low in late September. The gains have been driven by expectations of higher inflation under the Trump administration, along with the risk of a Fed rate cut and safe-haven demand amid geopolitical tensions.
Last week, several Federal Reserve officials expressed caution about cutting interest rates, which supported the dollar. St. Louis Fed President Alberto Musalem said a pause in rate cuts could be expected this month. San Francisco Fed President Mary Daly said there was no urgency to cut rates. Chicago Fed President Austan Goolsbee, however, predicted that rates could “fall significantly” next year.
“Comments from the Fed last week, with the exception of Goolsbee, suggest officials are concerned about persistent inflation and are preparing the market for a possible pause in rate cuts,” strategists at Brown Brothers Harriman & Co. said. They also noted that inflation data this week will be important, and any signs of rising price pressures could alter expectations for a December rate cut and support the dollar.
Traders now see an 80% chance of a Fed rate cut this month after Friday’s mixed jobs report. November inflation data due this week will be closely watched ahead of the Fed’s decision on Dec. 18.
The international context also contributed to the USD’s appeal as a safe haven asset. Specifically, the collapse of the Bashar al-Assad regime in Syria, political instability in South Korea after the failure of martial law and the recent no-confidence vote in France have increased demand for the USD.
“Investors are looking for safe havens amid political uncertainty in France and South Korea, which reinforces the appeal of the US dollar as both a safe haven and a yield-earning asset,” said David Forrester, senior strategist at Credit Agricole CIB in Singapore.
Investment positions in USD and other currencies
Asset managers are holding a large long position in the euro, which has reached $23.4 billion, down from a peak of $64 billion in May 2023, according to CFTC data. They are also bearish on the Canadian dollar, British pound and Swiss franc.
Hedge funds have a total long dollar position of $14.4 billion, driven largely by bets on the euro and Canadian dollar.
“How the world views the dollar in 2025 will be important, not just for gold or Bitcoin, but for all sorts of risks in the market – from US debt financing, US trade to the value of the dollar in a context of global uncertainty,” said Bob Savage, chief market strategist at BNY New York.
