Among the hedge-fund crowd, no currency comes close to the dollar in terms of appeal.
Together with other large speculators, the lightly regulated pools of capital have pushed net bullish-dollar positions to a record $48 billion, data from the Commodity Futures Trading Commission in Washington show. So convinced are they the greenback will extend its biggest rally since the global financial crisis that it’s now seen gaining against the euro, yen, pound and its five other major peers.
While the U.S. economy still isn’t growing as fast as it did before its 2007 plunge into the deepest contraction since the Great Depression, the outlook is more attractive when stacked against the increasing prospect of euro-area deflation, a Japanese recession and a China-led emerging-market slowdown. Bloomberg’s Dollar Spot Index has gained almost 10 percent since mid-year.
“The U.S. is still the cleanest shirt in the dirty laundry,” Jennifer Vail, the head of fixed income at Minneapolis-based U.S. Bank Wealth Management, which oversees $120 billion, said by phone on Nov. 20. “I don’t view it as a crowded trade, I view it as people piling into the dollar due to the potential for further economic growth.”
The U.S. economy will expand 3 percent next year, versus 2.15 percent across the Group of 10, according to analysts surveyed by Bloomberg. The Federal Reserve is now weighing whether to raise its benchmark interest rate next year from the record-low zero to 0.25 percent range it’s been in since 2008.
Bloomberg’s index -- which tracks the U.S. currency against 10 major exchange rates including the euro, yen and pound -- rose to 1,099.49 as of 1:18 p.m. in New York, set for its highest close since March 2009 and a fifth straight monthly gain.
“The dollar is the best in an ugly parade,” Alan Ruskin, the global head of G-10 foreign exchange at Deutsche Bank AG, said yesterday by phone. “It’s hard to really make a story that’s more constructive than the dollar story in the G-10.”
Deutsche Bank predicts the dollar will strengthen to $1.15 per euro and 125 yen by the end of next year, from $1.2469 and 117.91 today. The U.S. currency reached a two-year high of $1.2358 against the euro and a seven-year high of 118.98 yen earlier this month.
U.S. Bank Wealth Management’s Vail sees the greenback at $1.2350 per euro at the end of this year and $1.22 by the first quarter of 2015. Median estimates of at least 60 strategists surveyed by Bloomberg put the dollar at $1.23 per euro and 116 yen on March 31, and by the end of the next year the greenback is seen advancing against 11 of its 16 most-traded peers.
The $48 billion held by hedge funds and other large speculators represents 393,529 futures contracts in the week ended Nov. 18, the CFTC data show. They were negative on the dollar against eight major peers as recently as July.
The last time there was a net-long position in the dollar against all eight of its major peers was March 2009, when the Bloomberg Dollar Spot Index reached 1,144.15. It then started on an eight-month-long, 17 percent slump that saw it fall to 954.
Bank of America Corp., citing its own data tracking flows, said investors started selling the dollar against Japan’s currency last week. The U.S. bank said it would use any declines to buy more dollars.
“We continue to be dollar-bullish but, in the short term - - because the rally took place too soon, too fast -- we’re concerned about some contrarian moves,” Athanasios Vamvakidis, the head of G-10 foreign-exchange strategy at Bank of America in London, said yesterday by phone. “Given the flows, it seems profit-taking can in the very short term trigger downside moves for dollar-yen. But we’d buy the dip.”
The positive effect on the dollar from speculation the Fed may raise rates next year is amplified by the European Central Bank and Bank of Japan extending their own currency depreciating stimulus programs. China unexpectedly cut borrowing costs on Nov. 21 as the world’s second-largest economy stepped up efforts to combat slowing growth amid a slump in demand for its exports.
Bank of Montreal predicts the dollar will strengthen to $1.22 per euro and 125 yen by the end of next year.
While he’s “bullish” on the dollar, it may pare its gains through December, “given the positioning, and as people tend to trim positions into year-end,” Greg Anderson, the bank’s global head of foreign-exchange strategy, said yesterday by phone from New York. “I fully expect in January and February the dollar to be back to its torrid pace of appreciation.”