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Investors are betting on further weakness in the dollar after the latest decline from last month’s banking crisis, as the Federal Reserve limits how much it can raise interest rates and U.S. investors seek returns overseas.

After an 18-month bull run that took the currencies to a 20-year high in September last year, the greenback retreated as analysts cut expectations for a US interest rate hike. Last week, the dollar hit a one-year low against the euro as well as a broader basket of currencies.

Despite the setbacks, hedge funds and some analysts believe that economic growth is improving in the euro zone, and the United Kingdom will continue to exert downward pressure on the dollar.

“The dollar has had a great run, but it’s starting to turn around,” said Alan Raskin, chief global strategist at Deutsche Bank. “The pessimism we saw about Europe last year following the outbreak of war in Russia and Ukraine is fading and at the same time other currencies have their own positive stories.”

Speculators have doubled their short positions in the dollar since mid-March, according to calculations by Refinitiv based on CFTC data, indicating that hedge funds are betting the dollar will fall further. Speculators added to their short positions in the latest weekly data through April 10, bringing the total to $10.73 billion.

Deutsche Ruskin highlighted a rosier economic picture in Europe, with new Bank of Japan governor Kazuo Ueda expected to ease long-term confidence amid mounting pressure on interest rates, the main driver of currency movements. .

The European Central Bank is widely expected to raise interest rates by half a point to 4 percent in June, as growth and tight labor markets raise concerns that the battle against inflation is not entirely won.

And even though Ueda is sticking to his old leadership style, that doesn’t rule out speculation that Japan might want to gradually unwind the Boje’s manipulation of the yield curve to help keep interest rates low.

A line chart of the dollar against a basket of US trading partners shows the dollar falling to a one-year low.

In the UK, markets are almost entirely on the heels of a half-point rate hike by the Bank of England in September.

In contrast, after a widely expected quarter-point hike at the May meeting, expect the Fed to start cutting interest rates soon if the growing U.S. recession plays out.

The recent US banking crisis has also weighed on the dollar.

A routine survey by the Dallas Federal Reserve showed a sharp decline in the rate of across-the-board bank lending following three bank failures in a single week in March. Several jobs data also pointed to a softer labor market, although the most widely watched, monthly payrolls report has yet to back that up.

“The shock to American banks . . . It reinforces the idea that the U.S. could enter recession before other major economies,” which is negative for the dollar, said Ibrahim Rahbari, currency strategist at Citigroup.

Meanwhile, the Fed’s support for the banking system, including new credit facilities, has partially reversed its efforts to weaken the balance sheet. Known as quantitative tightening, the cuts were another way to reduce excess money in the system, but the Fed’s need to pump money into regional banks undermined its efforts.

“Essentially, exchange rates are an extension of monetary policy— [the] The dollar had a good run as the Fed looked to tighten policy,” said Chris Turner, head of FX strategy at ING. “That all changed earlier this year with signs of a slowdown exacerbated by the banking crisis.”

However, the funds’ bets on further dollar weakness could be realized if investors suddenly rush to the scene during a crisis.

According to Jane Foley, Rabobank’s head of foreign exchange strategy, current trends weighing on the dollar can evaporate quickly if markets sense another weak link in the financial sector or the global economy. “[The] The dollar can go much higher without much hype.

And as has been the case this year, any road to further dollar weakness could be difficult as investors wonder how far central banks will need to tighten monetary policy to control inflation.

“Looking back at this year, it was like a Goldilocks situation when the inflation headlines dropped in January. Then in March the market weakened because of the bank turmoil,” said Athanasios Vamvakidis, head of G10 foreign exchange strategy at Bank of America.

“It’s not going to be a straight line. It’s going to be a rollercoaster ride,” he said.