Investors are closing bearish bets on the dollar by the most since December, helping to lift the U.S. currency to an eight-week high, on speculation the global economic recovery is losing momentum.
Futures traders cut bets for a decline in the U.S. currency versus the euro, yen, Swiss franc and the Canadian dollar, and raised those for a gain in the greenback versus the British pound, according to May 24 data from the Commodity Futures Trading Commission in Washington.
Confidence in the outlook for the nations sharing the euro fell to a seven-month low and U.S. consumer spending rose by less than economists forecast in April, reports showed on May 27. The Dollar Index, which tracks the greenback against the currencies of six major trading partners, has increased 2.7 percent this month.
“The short-squeeze on the dollar is waning to an extent,” said Niels Christensen, chief currency strategist at Nordea Bank AB in Copenhagen. “Uncertainty in the euro is causing a lot of investors to unwind their long positions in the euro, and that’s causing a natural flow back into dollars. A lot of positions have also come off in the riskier emerging market and commodity-based currencies.”
The Dollar Index dropped to 74.581 as of 1:53 p.m. in Tokyo from 74.958 in New York yesterday. The gauge has risen 2.6 percent since falling to a 2 1/2-year low of 72.696 on May 4. It climbed to 76.366 on May 23, the strongest since April 1.
A European index of executive and consumer sentiment slipped to 105.5 in May, the lowest level since October, figures from the European Commission in Brussels showed on May 27. U.S. consumer purchases rose 0.4 percent last month, compared with economists’ median estimate of 0.5 percent, according to Commerce Department data.
Strategists’ forecasts for the dollar are little changed. The median of 43 estimates in a Bloomberg survey is for the greenback to trade at 88 yen by year-end, compared with a prediction for 87 yen on May 19. The U.S. currency will trade at 98 Canadian cents by Dec. 31, versus a prediction of 97 cents on May 19, another survey shows.
“Economic data suggests that we are seeing a mid-cycle peak in global growth,” said Callum Henderson, global head of foreign-exchange research in Singapore at Standard Chartered Plc, in an interview. “As a result, the dollar is getting a temporary bid as risk is taken off the table.”
Hedge funds and other large speculators boosted bets against the dollar to 401,523 contracts on May 3, the most since March 14, according to Commodity Futures Trading Commission data. Since then, so-called net-short positions have decreased to 222,109, the least since Jan. 17. In the past three weeks, dollar shorts have diminished 54 percent, the largest reduction since the four weeks ended Dec. 7.
“Given the market in April was massively short dollars as we all know, you saw those positions being cut and therefore the dollar benefited,” said Henderson.
The difference in the number of wagers on an advance in the euro compared with those on a decline -- so-called net longs -- fell to 19,129 on May 24 from 41,645 a week earlier, CFTC data show. Net longs in the yen fell to 8,006 from 15,373, those in the franc dropped to 14,725 from 15,661 and those in Canada’s dollar declined to 21,277 from 26,291. Net shorts in the pound increased to 14,143 on May 24 from 928 a week earlier.
At the same time, traders raised bets the Australian and New Zealand dollars will strengthen versus the U.S. currency. Net longs for Australia increased to 53,043 on from 50,991, and those in the New Zealand currency climbed to 13,876 from 12,624.
The dollar has strengthened 1.4 percent in the past month, according to Bloomberg Correlation-Weighted Currency Indexes, which track the performance of a basket of 10 developed-market currencies. The Swiss franc has appreciated 3.5 percent and the yen has risen 1.4 percent.