(May 27): Bullish sentiment on the US dollar is rapidly receding amid signs the US economy is cooling, with a group of investors holding a net short position for the first time in six weeks.

While leveraged funds still held bullish wagers on the greenback last week, they were dwarfed by increased net dollar shorts owned by asset managers, Commodity Futures Trading Commission data showed. Combined, they held a net short position, with contracts worth US$5.36 billion (RM25.22 billion) as of May 21. That compared with a net US$2.02 billion long position a week earlier.

During this period, US monthly inflation data cooled for the first time in six months, while retail sales stagnated in April, boosting odds for Federal Reserve (Fed) interest rate cuts. Investors will now turn their attention to personal consumption expenditures (PCE) data due on Friday — the Fed’s favoured inflation gauge — for any signals for the central bank to start easing policy.

“Positioning is going to be volatile in the near term, depending on the incoming US economic data,” said Carol Kong, a currency strategist at the Commonwealth Bank of Australia. “But I think ultimately the markets will turn more bearish on the US dollar, as it becomes clear the Federal Open Market Committee will start cutting rates.”

The US currency weakened against almost all of its Group of 10 peers between May 14 and May 21, leading to a decline of 0.4% in the Bloomberg Dollar Spot Index. In that week, investors boosted net dollar shorts against the euro, while trimming bullish wagers against the pound, contributing to the shift in the overall dollar position. Net dollar longs against the yen still increased.

For investors to prepare for a new cyclical dollar downturn, the Fed has to “play ball”, said Rodrigo Catril, a senior foreign-exchange strategist at National Australia Bank Ltd. “Thus, the personal consumption expenditures [data] this week will be important. A soft or in-line number will keep Fed rate cut expectations this year alive.”