Greenback weakens and it could get worse after Fed signals

US dollar bears believe there is further weakening ahead.

Dollar weakness looks to have room to run after the Federal Reserve said further interest rate hikes would be data dependent, bolstering traders’ confidence that the US tightening cycle is near an end.

Bloomberg’s gauge of the US currency fell for a third session Thursday, bringing this year’s losses to more than 3% after the Fed raised rates by a quarter point and emphasized its next move will depend on incoming economic data. The greenback weakened against every Group-of-10 peer in Asia trading, with New Zealand and Australia’s currencies leading gains.

The Fed’s messaging gave fresh fuel to a rising chorus of dollar bears like AllianceBernstein Holding LP and M&G Investments who see a slowing US economy tempering the Fed’s appetite for future hikes and validating the case for a weaker greenback. Asset managers have boosted their short dollar bets to a record level, while hedge funds also flipped to a net short position on the US currency this month, Commodity Futures Trading Commission data show.

“We see a lot of dollar selling from our institutional clients,” said Noel Dixon, global macro strategist at State Street Global Markets. “The market wants to latch on to any whiff of the immaculate disinflation narrative. We see it in our internal indicators.”

The Bloomberg Dollar Spot Index fell 0.3% Thursday. Asia’s emerging market currencies also rallied, with Thailand’s baht and the Malaysian ringgit advancing most. An MSCI gauge of developing currencies has risen almost 3% this year, paring last year’s 4% loss.

For HSBC Holdings Plc strategists including Daragh Maher, the key for the US currency will be whether inflation can continue to slow toward the Fed’s target, without a deep economic downturn.

“If the US data supports this Goldilocks scenario, which it mostly has done lately, then the grind lower in the dollar could resume,” the strategists wrote. “However, sticky US inflation or a more marked deceleration in activity would likely see the dollar rally through rates and risk aversion.”