Top Dollar Sages See Rally Resuming as U.S. Growth Outperforms

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Don’t be fooled by the dollar’s recent struggles.

That’s the message from the greenback’s most accurate prognosticators, who see the currency resuming its rally as the U.S. economy picks up at the same time that Europe tussles with a potential default by Greece. They see dollar strength after the Federal Reserve raised its assessment of the labor market and the economy, keeping the central bank on track to increase interest rates this year.

“The U.S. recovery is intact,” John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark, said by phone Tuesday. There’s a “high risk that is not at all priced into the market and could fully get the dollar rally back on track.”

Saxo Bank and BNP Paribas SA, the two best forecasters of the exchange rate in the first quarter, say the Fed’s eventual raising of rates will push the U.S. currency to new heights after its 20 percent surge against the euro in the last year.

The dollar has had a shaky start to this month, dropping 3 percent against the euro as a standoff over Greece’s debt prompted declines in European equity and bond markets, spurring traders to close out wagers funded in the shared currency.

Saxo and BNP still see the dollar strengthening to parity with the euro by year-end from $1.1342 as of 4:12 p.m. in New York. That’s more bullish than the median forecast of 97 analysts predicting $1.05 per euro by Dec. 31.

Fed Forecasts

Fed policy makers disappointed dollar bulls Wednesday with an update that was more dovish than expected, according to Steven Englander, global head of Group of 10 currency strategy at Citigroup Inc. in New York. He still anticipates the greenback will appreciate longer term.

“They do have not much incentive to sound concrete about a September hike this far in advance, and would not want asset market reaction in advance of an anticipated September hike to derail an actual September hike,” Englander wrote in a note Tuesday.

Even as Fed officials lowered their expectations for how high rates will rise in 2016, the tightening of monetary policy while most central banks are adding stimulus will propel the greenback’s ascent, he said. Citigroup predicts the dollar will strengthen to $1.03 by year-end and reach parity with the euro in the first quarter of 2016.

The Fed issued new economic forecasts after its meeting in Washington that implied two quarter-point rate rises this year, though with a shallower pace of increases in 2016. The officials maintained their projection that the benchmark rate would rise to 0.625 percent in 2015 and dropped it to 1.625 percent next year.

Futures Wagers

While the dollar has weakened from as strong as $1.0458 per euro in March amid signs of growth in Europe, greenback investors have found some comfort lately in data that’s signaled the world’s largest economy is picking up after a tepid first quarter. Nonfarm payrolls climbed by 280,000 in May, while retail sales excluding automobiles gained 1 percent.

“We’re very dollar bullish,” Luke Bartholomew, an investment manager at Aberdeen Asset Management Plc in London, said by phone Tuesday. “The dollar is the most obvious and outstanding trade” in the run-up to any Fed interest-rate increase, said Bartholomew, whose firm manages $491 billion.

The improving outlook has prompted hedge funds and other money managers to increase their net-long positions on the dollar for the last three weeks, the longest run in five months. Bullish wagers outnumbered bearish ones by 363,107 contracts in the week to June 9 compared with 338,451 the previous week, according to data from the Commodity Futures Trading Commission.

Yield Difference

The dollar resumed gains in May after dropping in April. Prior to that, it had risen 28 percent from the end of June 2014 through March -- the longest monthly winning streak since the euro was introduced in 1999 -- as Fed plans to tighten contrasted with central banks in Europe and Japan that are carrying out unprecedented stimulus.

That has widened the difference in yields between two-year German and U.S. government debt to about 85 basis points, or 0.85 percentage point. That’s close to the biggest premium since before the global financial crisis.

“We do expect a lower euro-dollar as the first hike gets closer and closer,” Jens Naervig Pedersen, an analyst at Danske Bank A/S, said by phone from Copenhagen Monday. The bank, which was ranked the third-best forecaster of the currency pair in the first quarter, expects the dollar to appreciate to $1.04 per euro in the next three months.

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