Currency Traders Sidestep Dollar Ahead of Uncertain US Election

As the US election approaches, investors are increasingly cautious about the outlook for the US dollar, favoring trades that steer clear of the world’s reserve currency. Major financial institutions, including Wells Fargo, RBC, and Allspring Global Investments, report a clouded near-term direction for the dollar, prompting a shift in market strategies.

With uncertainty surrounding the election outcome, traders are exploring alternative currency pairs, such as shorting the Swiss franc against the Japanese yen and buying the British pound against the New Zealand dollar. "Investors are trying to stay clear of the dollar and take more cross-currency exposure," noted Elsa Lignos, global head of FX strategy at RBC Capital Markets.

Traditionally, the dollar plays a dominant role in the foreign-exchange market, accounting for 88% of all trades in the $7.5 trillion-a-day market. However, with the Federal Reserve debating interest rate cuts and the election looming, the risk of taking a strong directional view has prompted many to adopt a more cautious stance.

Long-Term Dollar Positioning Remains Neutral

Recent data from State Street Global Markets indicates that long-term investor positioning in the dollar is the most neutral it has been in two and a half years. Speculative players, including hedge funds, have increased bets against the dollar, but their positions are less extreme than earlier in the month.

“Let’s get through that growth uncertainty and see how the election plays out,” said Aaron Hurd, portfolio manager at State Street Global Advisors, who anticipates the dollar could fall “much lower” once there is more clarity regarding the election and economic indicators.

With Vice President Kamala Harris narrowly leading Donald Trump in the polls, conviction about the election's impact on the dollar has diminished. Consequently, the Bloomberg dollar index has declined about 3% since early August, influenced by weaker-than-expected non-farm payroll data that set the stage for potential rate cuts.

Market Trends Amid Election Uncertainty

As the market awaits critical job data this Friday, strategists at JPMorgan and Nomura suggest maintaining a light and net-neutral dollar exposure until the labor market data offers better clarity on the Fed's path. Meanwhile, Nomura expects currencies like the sterling and Australian dollar to outperform the New Zealand dollar instead of the US dollar, indicating that markets may be pricing in too much in terms of Fed easing.

The volatility surrounding the elections has traders opting for safer bets and cross-currency plays, with Wells Fargo highlighting strategies like shorting the franc-yen as favorable alternatives amid dollar uncertainty.

Vassilis Karamanis, an FX strategist, noted that while options pricing suggests a modest bearish sentiment towards the dollar in the near term, the dollar's haven status and potential future dollar-supportive policies from the next administration could still attract demand.

As the election date nears, positioning around this uncertainty is expected to intensify, with macro trades and cross-currency strategies gaining traction among investors looking to navigate the volatile landscape ahead.