Over the past 20 years, there have only been six instances of fund managers rapidly reducing their holdings of the US dollar, with the most recent one leading to a swift depreciation of the US Dollar Index by about 10%.

As the market's expectation grows that the Federal Reserve has concluded its interest rate hikes and will implement multiple rate cuts next year, investors are selling the dollar at the fastest pace in a year.

State Street, which custodies assets worth $40 trillion, stated that asset management companies are on track to sell 1.6% of their dollar open positions this month, marking the largest monthly outflow of funds since November last year. The bank indicated that since the weaker-than-expected employment data was released in the US on November 3rd, fund managers have been conducting "significant" sales on a daily basis.

This has partly driven the dollar to its worst monthly performance in a year. Analysts caution that the asset management companies' sell-off of the dollar may only be the beginning of a long-term trend of investors reducing their exposure to US assets.

Michael Metcalfe, the head of macro strategy at State Street, said, "The capital flows of the past two weeks indicate that investors are reassessing their demand for the dollar," and added that the recent sales signal the unwinding of "extremely crowded dollar long positions." He stated, "Investors think, 'If the Fed really cuts rates, then I don't need to hold so many dollars.'"

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According to State Street's data, there have only been six similar instances of fund managers rapidly reducing their holdings of the dollar over the past 20 years. The most recent one occurred last November, after which the US Dollar Index, which measures the exchange rate changes of the dollar against a basket of currencies, depreciated by about 10% before the end of January.

Metcalfe added that despite the recent dollar sell-off, asset management companies still hold more dollars relative to other currencies, indicating that the dollar may have further room to fall.

Last year, the dollar soared on the back of the Fed's interest rate hikes. By the end of September, the US Dollar Index had risen by as much as 19%, bringing substantial profits to macro hedge funds holding bullish positions, but it weakened significantly in the fourth quarter of last year.

Between July and October this year, the dollar rose by more than 7% again, driven by strong economic data that pushed US benchmark borrowing costs to their highest point in 16 years, convincing investors that interest rates would remain high for a longer period.

However, in the past few weeks, the situation has changed again. The US CPI inflation rate for October fell to 3.2%, a drop that exceeded expectations, prompting investors to almost completely rule out the possibility of further rate hikes. The US Dollar Index has retreated to roughly the same level as it was at the beginning of the year, and the interest rate futures market now expects the Fed to have a rate cut of more than 0.5 percentage points before September next year.Geoff Yu, a foreign exchange strategist at BNY Mellon, which has a custody scale of $46 trillion, said that in the past 20 days, the company's clients have "sold the dollar at the fastest pace this year," preferring to buy the yen, Canadian dollar, and a range of Latin American currencies.

The weakening of the dollar is good news for the Japanese Ministry of Finance. Earlier this month, the yen's exchange rate against the dollar was close to a 33-year low, which exacerbated Japan's inflationary pressures, increased the cost of imported goods, and forced the Ministry of Finance to prepare for currency intervention.

Although the yen has depreciated by about 12% against the dollar this year, the currency pair appreciated by about 1.5% in November, providing some respite for the yen's decline.

Yu expects the yen to continue to strengthen, anticipating that the Bank of Japan will abandon its negative interest rate policy in the coming months. He said: "There is not much point in shorting the yen, as each policy meeting of the Bank of Japan will be a live event."

The weakness of the dollar has also brought some relief to emerging market countries. This makes it easier for them to repay dollar-denominated loans and may begin to attract investors back to emerging markets after a large amount of hard currency debt was sold this year.

"We have increased our holdings of emerging market stocks and commodities," said Florian Ielpo, head of macro multi-asset at Lombard Odier Investment Management, adding that the environment of a weaker dollar is "breaking some popular reasons for bullish U.S. stocks."

The MSCI Emerging Markets Equity Index has risen by 3% so far this year, far behind the nearly 19% increase of the S&P 500 Index.

Francesco Sandrini, head of multi-asset strategy at Amundi, said that heading into 2024, he expects the dollar to continue to weaken, "partly because we expect less turmoil between the two major powers," which means that investors' demand for the dollar as a safe haven will decrease.

However, he added that since the outbreak of the Russia-Ukraine conflict, the usual rotation between developed and emerging markets has "had some issues." He pointed out that investors prefer the stock markets of Mexico and Brazil, partly because these countries are considered to be in a favorable political position.

He said: "We see a lot of interest in emerging markets, but I think there is a bit of a conflict between the weakening dollar and geopolitical concerns."