Dollar On Track For Biggest Plunge Since 2015 As Investors Exit Crowded Positions

Investors are stampeding away from the dollar, as softer-than-expected U.S. consumer price data raises hopes that the Federal Reserve may need to tighten monetary policy less than expected in its fight against inflation.

The scope of the dollar's moves against many currencies on Thursday has been breathtaking, as investors pull back from what has been seen as an extremely crowded trade in foreign exchange markets.

At 12:30 p.m. (1730 GMT), the U.S. currency was down as much as 2.9% against Japanese yen, its sharpest one-day slide since July 2016. Against the euro, it was off by 1.4%, its biggest drop since Nov. 4. Against a basket of currencies, the dollar was off about 1.9%, on pace for its worst day in nearly seven years.

"It was a crowded trade for sure. The best proof is the major reaction to any reason to sell the greenback like today," said John Doyle, vice president of dealing and trading at Monex USA.

The consumer price index rose 0.4% in October to match the prior month's increase, the Labor Department said. Economists polled by Reuters had forecast the CPI would advance 0.6%.

The data sent U.S. Treasury yields tumbling, with the benchmark 10-year hitting 3.8555%, its lowest in about a month - narrowing gaps between yields on U.S. and foreign government debt that have burnished the dollar's appeal.

Worries over a violent reversal in the dollar have mounted in recent months, as the greenback extended a rally to a two-decade peak against a basket of currencies, gaining nearly 20% for the year.

As of Nov. 1, International Monetary Market speculators were net short 77,620 contracts on the Japanese yen, worth $6.54 billion, as well as sizeable bets against the British pound, the Australian and Canadian dollars, CFTC data showed.

The reversal of these trades could fuel further dollar weakness, analysts said, if further signs of economic softening lead investors to bet on a less hawkish Fed.

"We have seen the markets reprice the terminal rate lower, that is also leading or cascading this take profit move in the dollar," said Bipan Rai, North American head of FX strategy at CIBC Capital Markets. "Because positioning imbalances have been around for some time there is the risk that we could see this period of dollar weakness extend as those still dollar long get cleared out."

A softer dollar would come as a relief to U.S. exporters and multinationals, whose balance sheets have been battered by a stronger currency this year, as well as emerging market economies that have borrowed in dollars.

Daniel Wood, portfolio manager on the emerging markets debt team at William Blair, has increased bets on emerging market currencies rising against the dollar.

"The market is less worried about financial conditions tightening. So, the dollar safe haven status is not so important," he said. "So, investors feel more comfortable buying other currencies. I think this is a microcosm of what's going to happen over the next year."