Foreign-exchange traders reduced their bets against the dollar by the most on record as demand for U.S. Treasuries soared amid concern the global economic recovery is faltering.
Aggregate bets the greenback will weaken against the euro, the yen, the Australian, Canadian and New Zealand dollars, the pound, the Swiss franc and the Mexican peso plunged by 154,105 contracts to 153,216 in the week ended Aug. 9, the biggest drop ever in Commodity Futures Trading Commission data compiled by Bloomberg beginning in November 2003. The data show that for the first time since January traders are betting the U.S. currency will appreciate versus the 17-nation euro on speculation Europe’s sovereign-debt crisis is spreading.
“The selloff in risk assets is due to the repricing of global growth,” said Ray Attrill, head of currency strategy at BNP Paribas SA in New York. “The volatility levels have just been off the scale in foreign exchange, and that has deterred people from taking up the Fed’s invitation to use the dollar as a funding vehicle for risk appetite.”
The Federal Reserve said in its Aug. 9 statement that it’s prepared to use a range of policy tools to boost the economy, including keeping the target interest rate for overnight loans between banks at record lows until mid-2013. The central bank’s decision came after the unprecedented cut of the U.S. AAA credit rating by Standard & Poor’s on Aug. 5 pushed down equity markets further amid concern a global slowdown will deepen.
Group of Seven
Group of Seven nations sought last week to head off a collapse in investor confidence that saw investors demand assets associated with traditional havens including Switzerland, Japan and the U.S. The coalition issued a joint statement Aug. 8 that said they will take every action necessary to stabilize financial markets.
“The adjustment process, equities, risk currencies and commodities with the exception of gold reflect a more realistic assessment of economic output here and abroad,” said John McCarthy, managing director of currency trading at ING Groep NV in New York. “Waiting for the Fed to do something so asset prices can go up is not a reason to buy risky assets.”
Treasuries soared, driving the yield on the benchmark 10-year note to a record low 2.0346 percent on Aug. 9. The Treasury sold $72 billion of notes and bonds last week, with the auctions for three-year and 10-year debt priced at record low yields with above-average demand from investors. The 10-year yield climbed three basis points to 2.29 percent at 2:25 p.m. in New York.
“Our preferred strategy is to keep selling rallies in the euro, sterling, Australian and Canadian dollars against the greenback given our cautious view on the outlook for financial markets,” Mansoor Mohi-uddin, chief currency strategist in Singapore at UBS AG, wrote in a note to clients.
The greenback appreciated 0.6 percent last week, according to Bloomberg Correlation-Weighted Currency Indexes, which track the performance of a basket of 10 developed-market currencies. The franc fell 0.9 percent, the Aussie dropped 0.4 percent, the yen gained 3 percent and the euro strengthened 0.3 percent.
The dollar slipped 1.4 percent to $1.4449 versus the euro today. The U.S. currency strengthened 1 percent against the Swiss franc to 78.55 centimes and gained 0.1 percent to 76.77 yen. It weakened 1.3 percent against the Aussie to $1.0493.
Implied volatility among currencies surged last week, reaching the highest since June 2010, according to a JPMorgan Chase & Co. gauge. The JPMorgan Global FX Volatility Index reached 14.58 before ending the week at 13.34. The gauge was at 12.61 today, up from this year’s low of 9.99 in March.
Wagers by hedge funds and other large speculators on a decrease in the dollar are down from a record high 405,267 in March, data released Aug. 12 show. The last time there were net bets on a gain in the dollar was July 2010.
The number of bets on an advance in the dollar against the euro compared with those on a decline -- so called net-longs -- rose to 8,273, from net short position of 1,763. Futures traders cut their wagers the yen will gain to 42,149 from 58,833. Net longs for the franc declined to 4,655 from 12,341.
The euro dropped last week by the most against the yen in almost a month amid speculation the debt crisis will spread to France. The Swiss franc plunged from record highs against the euro and dollar after the Swiss National Bank said a temporary peg to the euro was possible to stem the franc’s gains.
The euro strengthened 0.6 percent to 109.98 yen today and surged 2.8 percent to 1.13912 francs.
French President Nicolas Sarkozy and German Chancellor Angela Merkel will meet Aug. 16 in Paris to discuss economic governance of the euro region, according to statements from both leaders’ offices. France, Spain, Italy and Belgium imposed bans on short selling to stabilize markets after European banks hit their lowest level since the credit crisis. A short is a bet an asset will decline.
“If this ban is temporary and calms the markets and restores the credit markets, the euro will breathe a sigh of relief,” said Boris Schlossberg, director of research at the online currency trader GFT Forex in New York.
Bets against the dollar rose to 310,222 contracts on July 26, the highest level in more than two months, on concern political wrangling in Washington on raising the U.S. debt limit would erode the value of the world’s reserve currency.
President Barack Obama signed a debt-limit compromise that prevented a U.S. default on Aug. 2, the day the Treasury had warned the nation’s borrowing authority would expire, ending a months-long debate that reinforced partisan divisions.
Strategists on average expect the dollar to fall 1 percent by the fourth quarter against 47 currencies, according to data compiled by Bloomberg. That compares with a predicted 2 percent decline on July 12. Against developed-nation currencies, the dollar is forecast to gain 1 percent.
Cumulative inflows into the U.S. currency in the past five days totaled almost four times the average amount compared with the previous year, according to iFlow data from Bank of New York Mellon Corp., the world’s largest custodial bank, with more than $26 trillion in assets under administration.
“Our iFlow bond and equity indicators also confirm a shift in asset allocation preferences with U.S. equities now the strongest net bought across the board given portfolio managers with longer-term investment horizons looking to avail of bargains at very attractive re-entry levels,” Samarjit Shankar, a managing director for the foreign-exchange group in Boston at BNY Mellon, wrote to clients.