COMMENT-It may be time to hedge the risk that dollar drops

Now that the dollar's rally has stalled and traders are heavily invested in it, this may be the time to hedge the risk that the U.S. currency drops.

Although the start of the expected easing cycle in the United States has been pushed back, it is still anticipated. The first cut is eyed in either June or July. The amount of easing seen this year has been dramatically reduced from at least six 25 basis-point moves to potentially just two.

The swing in expectations has brought market views for what the Federal Reserve may do this year in line with what policymakers had suggested when financial markets got excited at the start of the year, envisaging a March move, and possible drop toward 3% for the U.S. benchmark in 2025.

With markets and the Fed moving into line, the likely start of an easing cycle, which should see the U.S. benchmark reduced by 1% in the next twelve months, is set to impact traders who have piled into the dollar this year.

As a result of this buying, the dollar index gained around 5% between the end of 2023 and February 2024 but has stalled since. Although the dollar has stopped rising, traders have not stopped buying, quadrupling bets on a rise in a short period.

Weighed by this much bigger long position, the dollar has sunk roughly 1%, and a growing number of unprofitable positions may be inclined to exit before the easing cycle begins.

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