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Dollar Bear Bets Rise to Highest Since May on Debt Focus

U.S. Dollar Notes
Japanese yen notes and U.S. dollar notes are arranged for a photograph in Tokyo. Photographer: Tomohiro Ohsumi/Bloomberg

Investors boosted bearish bets on the dollar to the highest level in more than two months on concern the political wrangling in Washington on raising the U.S. debt limit will erode the value of the world’s reserve currency.

Aggregate wagers against the greenback rose for the fourth consecutive week, data from the Commodity Futures Trading Commission in Washington show. Futures traders added to bets the dollar will weaken against the euro, yen, Australian and Canadian dollars, British pound and Mexican peso. Wagers on a drop versus the franc were trimmed after the Swiss currency climbed to a record.

Investor sentiment on the dollar weakened through July as lawmakers clashed over spending cuts and taxes when negotiating an increase of the $14.3 trillion debt ceiling before the U.S. exhausts its borrowing capacity tomorrow. The franc rallied to records against the dollar and the euro as the budget impasse, slowing growth and Europe’s sovereign-debt turmoil spurred demand for a refuge.

There’s “clearly the concerns about the impasse on the debt negotiations,” Samarjit Shankar, managing director for the foreign-exchange group at Bank of New York Mellon Corp., said in a telephone interview from Boston. “You do have a fair amount of money going into” the Japanese government bond “market and Swiss bonds, but at the end of the day the dollar is the preeminent reserve currency,” he said.

Relative Performance

The dollar weakened 2.2 percent in July, according to Bloomberg Correlation-Weighted Currency Indexes, which track the performance of a basket of 10 developed-market currencies. The franc appreciated 5.4 percent, the Aussie gained 0.6 and the yen rose 3.2 percent. The 17-nation euro slumped 3 percent.

Hedge funds and other large speculators had reduced bets against the dollar to 147,684 contracts as of June 28, the lowest level in more than nine months, as European policy makers debated a debt restructuring for Greece. CFTC data as of July 26 show traders added 162,538 so-called net shorts as the focus shifted to the U.S. debt negotiations.

Momentum may be shifting again. Ninety-four percent of the 17 money managers overseeing a total of $1.26 trillion surveyed by Ried Thunberg ICAP Inc. expect the dollar to be stronger or steady relative to the euro in next three months, while 59 percent expect it to be stronger or steady against the yen. The New Jersey-based firm is a unit of the world’s largest interdealer broker.

‘Relief Rally’

“If we do get the debt-ceiling increase we could see a little short covering initially,” said Kathy Lien, director of currency research at the online trader GFT Forex in New York. “Depending upon how quickly rating agencies come in and respond by downgrading U.S. debt that will determine how long this relief rally will last.”

Standard & Poor’s, which has given the U.S. a top AAA ranking since 1941, said on July 14 that the chance of a downgrade is 50 percent in the next three months and may cut the rating as soon as this month if there isn’t a “credible solution” to reduce the nation’s deficit. Fitch Ratings and Moody’s Investors Service have also warned they may cut their grades for the U.S.

“More recently, in the last few days certainly, the scale of the potential deficit reductions that are being discussed is much smaller,” Steven Hess, the senior credit officer at Moody’s in New York, said in a July 29 telephone interview. “The smaller the actual reduction, the more likely a negative outlook.”

Cumulative Inflows

The U.S. currency saw cumulative inflows last week that were higher than the average of the previous year as Treasuries rallied, according to data from BNY Mellon, the world’s largest custodial bank, with more than $20 trillion in assets under administration.

Demand for Treasuries surged on July 29 after a report that the U.S. economy grew more slowly in the second quarter than forecast. Yields on benchmark 10-year notes tumbled 17 basis points, or 0.17 percentage point, last week to 2.80 percent, the lowest level since November. The yield was little changed today.

Strategists haven’t planned for a dollar selloff, maintaining expectations it will strengthen against the franc in the fourth quarter to 85 centimes per dollar, a survey of 38 contributors by Bloomberg shows. The median forecast for the dollar versus the yen has been at 85 since June 20, according to 47 economists in a separate survey.

Franc Gains

The franc appreciated 7 percent versus the dollar in July to 78.55 centimes. It was the sixth consecutive monthly gain, the longest winning streak since June 1994, with the Swiss currency touching a record 78.51 centimes on July 29.

The dollar dropped 4.7 percent to 76.76 yen in July after touching 76.73, the lowest level since reaching a post World War II record of 76.25 on March 17. The dollar strengthened to $1.4398 versus the euro, from $1.4502 in June. The 17-nation currency slid 5.4 percent in July to 110.54 yen.

Wagers by hedge funds and other large speculators on a decrease in the dollar versus the euro, yen, Australian dollar, Canadian dollar, franc, Mexican peso and British pound rose to 310,222 from 272,444 on July 19. The difference in bets on an advance in the euro compared with those on a decline -- so-called net longs -- rose to 17,038 from 9,246 a week earlier, data released July 29 showed.

European Debt Crisis

Concern that Europe’s sovereign-debt crisis would spread has persisted after European leaders announced an additional rescue package for Greece on July 21. Moody’s said on July 29 that Spain, the region’s fourth-largest economy, faces a possible downgrade amid yields on the nation’s 10-year bonds rising above 6 percent.

“There are still a lot of people who would like to sell the euro because of all the problems that there are in Europe, so there is not a strong bias for the euro,” said David Mann, regional head of research for the Americas at Standard Chartered Plc in New York. “There may be more investor interest in potentially selling the dollar against the franc, the yen and the Aussie dollar.”

Futures traders increased their bets that the yen will gain against the dollar to 51,302 from 42,155. Net longs for the franc declined to 7,877 from 11,494, and added bets Australia’s currency will advance to 81,438 from 77,795.

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