European Investors Bet Big on Dollar Decline as Market Turbulence Spurs Shift

European investors have started to short the US dollar amid recent market turbulence, according to Bank of America. This trend could potentially lead to a near 2% rise in the euro against the dollar by the end of 2024. Bank of America's forex strategists, Howard Du and Vadim Iaralov, pointed out that as US economic data aligns more closely with the rest of the world and yields decline, the dollar's appeal to foreign investors is dropping.

The investment bank highlighted that while the US dollar had significant gains earlier this year due to trading activities mainly from Europe and Asia, European investors have lately offloaded their long positions in August. According to a Bank of America survey, the number of investors anticipating a weaker dollar rose almost two-fold in the past month.

In the bank’s monthly confidence survey, about 23% of respondents stated that their most confident trade was shorting the dollar, up from 8% in July. Despite the greenback outperforming most G-10 currencies this year, its rally has faltered in the past month as data reflects a weakening US economy. This has led traders to bet on significant rate cuts by the Federal Reserve.

Bank of America's rate strategist, Ralf Preusser, mentioned, "Investors are less concerned about the upside risks to the dollar stemming from persistent inflation." He emphasized that this shift should initiate a decline in the dollar from its historical highs.

Survey responses between August 2nd and 7th from 45 global fixed-income fund managers revealed that 39% are bullish on the bond market, up from 31% in July and 49% in May. This shift in sentiment further underscores the anticipation of lower yields.