With the upcoming US election, traders' views are surprisingly consistent: avoid the US dollar!

Investors with divergent views on the outlook for the US dollar are increasingly favoring to avoid the US dollar. In recent weeks, various trading recommendations have emerged, from shorting the Swiss franc against the Japanese yen to buying the British pound against the New Zealand dollar. These recommendations, regardless of how Federal Reserve policies and the US election may impact the US dollar, can be profitable. "Investors are trying to avoid the US dollar and take on more cross-currency exposure," said Elsa Lignos, Global Head of FX Strategy at Royal Bank of Canada Capital Markets and Head of FX Sales for Europe, the Middle East, and Africa. "Due to the highly uncertain election outcome, it is difficult for people to incorporate it into forecasts and positions." This is a unique situation for the foreign exchange market, which typically follows the US dollar's trend. According to the latest trading volume survey by the Bank for International Settlements in the $7.5 trillion daily trading market, the US dollar usually accounts for one side of all trades, at a ratio of 88%. However, with debates over whether the Federal Reserve will cut rates quickly and the approaching election, holding strong directional bets is seen as too risky for some. According to State Street's Global Markets division at State Street Bank, long-term investors' positions on the US dollar are the most neutral in two and a half years, overseeing assets of over $44 trillion. Companies like State Street Bank, Royal Bank of Canada, Allspring Global Investments, and State Street Global Advisors have all delayed making large-scale US dollar bets until later this year due to political uncertainty. Although speculative market participants, including hedge funds, increased their bets on the US dollar last week, their positions were not as extreme as earlier this month. Instead, the market is turning to cross-currency pairs. Shorting the Swiss franc against the Japanese yen is a strategy recommended by Royal Bank of Canada to capitalize on central bank policy divergence, while Allspring is betting on the euro depreciating against the Norwegian krone. "The euro is expected to weaken," said Lauren van Biljon, Head of Rates and FX at Allspring's Global Fixed Income team. "Trading the US dollar purely is more difficult because there is too much happening with that currency pair from a political perspective." Similarly, fund managers at State Street Global Advisors are waiting to adjust their positions for a weaker US dollar after the November elections. "Let's get through the growth uncertainty and see how the election results play out," said Aaron Hurd, Portfolio Manager at State Street Global Advisors, adding that once the market has a clearer understanding of these issues, the US dollar could "plummet significantly." With Vice President Harris leading Trump by a slim margin in opinion polls, the upcoming elections have weakened their impact on the US dollar. J.P. Morgan and Nomura Securities stated that the outlook for Federal Reserve policy is also a factor contributing to the uncertainty in the US dollar's trend. Since early August, the Bloomberg Dollar Index has fallen by about 3%, following one of the weakest non-farm payroll data since the outbreak of the pandemic, reinforcing the path for the Federal Reserve to start cutting rates in September. The market is closely watching the employment data to be released this Friday to look for signs that the Federal Reserve may cut rates by another 50 basis points in November Morgan Stanley strategist led by Meera Chandan chooses to maintain an overall "low and net neutral" exposure to the US dollar until further US labor market data can more clearly indicate the interest rate path. Nomura Securities expects the British pound and Australian dollar to appreciate against the New Zealand dollar, rather than against the US dollar, as the institution believes that the market has priced in too much easing by the Federal Reserve. "The momentum of US data is not that bad, so it is currently difficult to predict a significant weakening of the US dollar against other G10 currencies." Dominic Bunning, head of Nomura Securities' G10 FX strategy, said, "As we enter the election phase, there is also volatility risk for the US dollar, so we are trying to avoid some noise by expressing views that have clear macro differences but smaller exposures to the US situation." Forex strategist Vassilis Karamanis pointed out, "Option pricing shows that the market slightly expects the US dollar to weaken in the next month, but this situation will change when the US election becomes the focus. Although some traders choose not to make large bets before the vote, demand for the US dollar in the forward market is strong. This is because of the US dollar's safe-haven status and speculation that the next government may adopt policies supportive of the US dollar." Brad Bechtel, global head of FX at Jefferies, said that positions around election risks will rise in October, adding that buying the US dollar against the Mexican peso and the renminbi is still a way to make the so-called "Trump trade." However, he said that apart from these bets, traders may stay away from the US dollar. Some market participants bet that Trump's re-election will intensify friction between the US and its largest trading partners. The Republican candidate has proposed a plan to impose a 10% tariff on all imported goods if he wins in November. Credit Suisse said that to avoid election risks, macro trades such as shorting the Swiss franc against the Japanese yen have always been the choice of investors who are cautious about the US dollar. This is weakening the bank's global macro strategist Aroop Chatterjee's expectations for US dollar appreciation in the coming months. "Our confidence in the US dollar is not high due to the election outcome," Chatterjee said. "This especially casts a shadow over the trend at the end of the year and the beginning of 2025."