Everyone Loves The US Dollar, But That Could Change In A Hot Second

Everyone Loves The US Dollar, But That Could Change In A Hot Second
Stéphane Renevier, CFA

over 1 year ago1 min

The US dollar is a go-to for investors these days, and it’s easy to see why: the currency is a safe haven amid sputtering global economic growth, while the Federal Reserve’s interest rate hikes have only made it more appealing to international savers and investors. So it stands to reason that fund managers currently consider the most crowded trade to be long the dollar. In other words, they see the dollar as the most one-sided market, in which buyers massively outweigh sellers.

That could have repercussions further down the line. See, when so many investors are buying an asset, that asset eventually starts to run out of new buyers to push the price up. And when investors get wise to it, they’ll want to take their profit while the market’s still high. That has a snowball effect as more and more investors sell up, sending the price of the asset further and further down.

Of course, investor sentiment isn’t the only factor driving the dollar, but so much bullishness certainly puts the currency at risk. Still, it would be good for markets more broadly: a strong greenback reduces the profits US firms make abroad, increases inflationary pressures overseas, and makes it more difficult for emerging markets to refinance their debt. So if the currency were to start slipping and the global economy were to take a breather, investors might crowd back around riskier assets like stocks and commodities instead…

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