By SARAH MORGAN
In spite of Standard & Poor's downgrade and the falling stock market, American retail currency traders are still betting heavily on the dollar as the world's top safe haven. And that, experts say, may be the biggest sign the greenback is slipping.
According to real-time data from currency brokerage FXCM, retail traders are overwhelmingly favoring the dollar to rise against the other two currencies largely considered to be safe havens, the Japanese yen and the Swiss franc. About 83% of traders taking positions on the dollar versus the yen are betting on the dollar to rise; almost as many dollar-Swiss traders are doing the same. If they're right, it would mean a strong reversal for the dollar, which has hit a record low against the Swiss franc and continues to fall against the yen as well.
Traders are basically trying to call the bottom, says David Song, a currency analyst for FXCM's DailyFX.com. Unfortunately for those retail traders, their bets are generally a model of what not to do -- and signal the continuing weakness of the dollar. As usual, Song says, "retail traders are just on the wrong side of the market." (The firm has said that it hopes publicizing this fact that retail sentiment is often wrong -- will help traders make smarter trades. So far, Song says, it hasn't.)
Analysts say they can see the rationale behind retail traders' moves. The Japanese government has already sold yen to push the value of the currency lower, and the Swiss central bank recently cut interest rates in an effort to weaken the franc. Both governments have indicated they could intervene further to push their currencies down. And if the global stock markets rally, investors may walk away from safe haven currencies in favor of something more risky; with central banks weighing on the scales, the move down could be bigger and faster than the move up has been, says Dean Popplewell, the chief currency analyst at Oanda.
All that said, analysts still say a bullish dollar bet is risky right now. There are plenty of signs pointing to sustained weakness in the dollar, including shaky economic data, mounting U.S. debt and, as of recently, the seeming unwillingness of Congress to make meaningful steps to shore up the country's balance sheets. After Standard and Poor's downgrade of U.S. government debt late Friday, several experts have said that the dollar would be a casualty. In a research note Saturday night, Barclays Capital analysts said that if foreign investors agree with the S&P's assessment of the U.S. situation, it could lead them to choose other currencies over the dollar.
Even beyond the current situation in the U.S., betting on government intervention isn't a strong strategy, says Camilla Sutton, the chief currency strategist at Scotiabank. The effects of such moves tend to be short-lived and the currency markets are so large, it's hard for a central bank to really make an impact.
For right now, strategists say, the smart bet is on the dollar to fall further against the other safe havens. For those determined to bet with the greenback, they have one word of advice: Wait.