The dollar is holding on to a rally that’s taken it to the verge of a decade high, drawing in speculators who have added to their investments backing the greenback with a constancy unsurpassed for more than two years.
A gauge of the U.S. currency climbed on Monday and was within 1 percent of the highest close since at least 2004, as futures traders saw a better than 50 percent chance the Federal Reserve will raise interest rates next month for the first time in nine years. Large speculators and hedge funds added to bets on the dollar’s rally for seven weeks through Aug. 4, data reported Friday showed, the longest streak since March 2013.
The dollar reached multiyear highs against all of its 10 major developed counterparts this year as Fed Chair Janet Yellen made it clear she expects to raise borrowing costs this year, while most of her peers either loosened policy or maintained unprecedented stimulus. Still, history suggests that long positions need not portend a successful one-way bet for the dollar.
“Monetary divergence will underpin the sustainable dollar buying trend,” said Masashi Murata, vice president at Brown Brothers Harriman & Co. in Tokyo.
The Bloomberg Dollar Spot Index reached 1,220.25 on Aug. 7 after a Labor Department showed U.S. jobs growth in July held the unemployment rate at a seven-year low, supporting optimism the economy is strong enough to withstand a rate increase. The index closed at 1,222.12 on March 13, the highest level since its inception at the end of 2004.
The gauge rose 0.2 percent to 1,214.31 as of 8:45 a.m. New York time Monday. The dollar rose 0.3 percent to 124.64 yen and advanced 0.8 percent against the Aussie to 73.62 cents.
The dollar has at times fallen after the Fed raised interest rates, and a series of increases in speculative positions similar to the recent trend has also acted as a danger sign in previous years.
The greenback reversed gains after seven-week stretches of increases in dollar longs that concluded in March 2013 and October 2011. A record eight-week series of increases that came to an end in June 2010 was followed by a tumble of more than 7 percent in the space of about two months for the Bloomberg dollar gauge.
“Probably, the warning sign is clearly that the market was originally underpositioned,” said Evan Lucas, a markets strategist in Melbourne at IG Ltd., pointing to a covering of dollar short positions some weeks ago when markets shifted their views toward a September rate hike from December.
“In the first six weeks of a Fed hike, there’ll be a fairly reasonable dollar appreciation,” he said. “For the first time in history, the Fed is pretty much on the other side of the equation, with other central banks being neutral or providing stimulus, whereas the Fed is completely on the other side looking to be hiking rates.”
For more, read this QuickTake: The Almighty Dollar