RPT-COLUMN-Dollar exit could be crowded for some time: Mike Dolan

By Mike Dolan

LONDON, June 18 (Reuters) - It's tempting to think the dollar's precipitous decline this year will soon taper off, but the move appears neither especially speculative nor cyclical and a durable turnaround could be years away.

The dollar index's .DXY near 10% decline so far this year against the most-traded currencies marks its steepest first-half loss since 1986, back when the greenback was still reeling from the then G5's "Plaza Accord" agreement to puncture the currency's overvaluation in late 1985.

And as overshoots are typical in currency markets, there are some reasonable questions about whether the dollar may have come down too far too soon, leaving it ripe for a correction.

Indeed, this month's global fund manager survey from Bank of America suggests at first glance that the dollar move may be overstretched.

The survey showed the net underweight position in the dollar is the largest in 20 years. What's more, "short dollar" had found its way into the top three "most crowded trades" on the planet according to investors. That was just behind "long gold" and "long Magnificent 7" megacap stocks.

Often seen as a contrarian indicator, crowded trades typically signal an extreme and potentially over-priced move.

But history shows that certain trades can stay crowded for quite some time.

The scramble for Magnificent 7 stocks, for example, was considered the single most-crowded trade in the same monthly survey for two years through this February. And yet exchange-traded funds tracking these seven mega cap tech stocks MAGS.K more than doubled in price over the same period, before eventually retreating late last year.

To be sure, highly speculative or leveraged trades can get overcooked and unwind a lot more quickly.

But dollar positioning among currency speculators is nowhere near historic extremes. According to weekly CFTC data, speculative net short dollar positions NETUSDALL= did accumulate to their most in about two years in April but have been pared back since. And the dollar has resumed its decline this month regardless.

'NAME OF THE GAME'

The 20-year high in dollar underweighting by asset managers in the BofA survey, by contrast, is of a different order altogether. That indicates both wariness of U.S. assets at large - due to concerns about the current U.S. administration's approach to global trade, geopolitics and institutional integrity - and a more structural dollar retreat.

It's notable that even with this year's 10% dollar decline and the existing underweight among global funds, almost two-thirds of survey respondents still saw the dollar as overvalued.

What's more, relatively short interest rates are often the driving force in cyclical currency moves - with the dollar sinking even as widening transatlantic rate gaps suggest otherwise.

"The name of the game will be diversifying away from the U.S. and into European and emerging market bonds," said Amundi chief investment officer Vincent Mortier on the release of the giant European asset managers' half-year outlook.

For others, such as Carlyle's Jeff Currie, the historic developments weighing on the dollar are related to long-term geopolitical shifts, defense and energy considerations.

The basis of his framework is that the U.S. retreat from international engagement - or its arm's-length engagement, as seen over the past week in the Middle East - is making the world more dangerous and more expensive. Tariffs and capital costs are rising, while liquidity is draining.

The net result is a weaker dollar, higher commodity prices and a demand for "asset-heavy" sectors like defense, which he argues should lead to higher growth and innovation in those countries with the capacity to fund these efforts.

"This is just the beginning of a much larger capital rotation out of the asset light sectors and into asset heavy sectors that are the backbone of global supply chains and slanted towards Europe," Currie wrote.

To reinforce the point, he highlights two prior rotations that each lasted about two years. These include the shift from 'BRICS' emerging market economies to U.S. tech in 2014-2015 and, before that, the move from dot.com stocks to BRICS in 2002-04 - the last time asset managers polled by BofA were this underweight dollars.

"We believe we are (now) in one of these rotations towards Europe given the valuations discounts in Europe and the region's stronger fundamental backdrop and fiscal capacity for defense," Currie wrote.

Of course, the dollar exchange rate, much like any other financial price, rarely moves in a straight line in one direction for very long.

But even if we get periodic bounces, the downtrend could persist for a lot longer - even as crowded as it may be already.

The opinions expressed here are those of the author, a columnist for Reuters.