Dollar Bull Herd Exposed as September Fed Rate-Rise Odds Shrink

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The biggest herd of dollar bulls since February is looking vulnerable as traders slash odds the Federal Reserve will raise interest rates next month.

The dollar dropped to the lowest level since June against the euro as an emerging-market rout pushed U.S. stocks to their biggest decline in 18 months. Minutes from the Fed’s July meeting released Wednesday showed most policy makers didn’t consider conditions for a rate increase to have been met.

“The Fed uncertainty has been heightened -- people had September as a date, now it has been moved to December,” said Fabian Eliasson, head of U.S. corporate foreign-exchange sales at Mizuho Financial Group Inc. “I don’t think we have supportive numbers here to say we’re stronger and can withstand the uncertainties in the global economy. The Fed will at least be cautious in their timing.”

The dollar fell against most of its 16 major peers, dropping 1.1 percent to $1.1242 per euro at 5 p.m. in New York, after a 0.9 percent slump on Wednesday. It fell 0.3 percent to 123.40 yen.

Futures show traders see a 36 percent probability the Fed will raise its benchmark rate at its Sept. 16-17 meeting, based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase. That’s down from about 50 percent before the Fed minutes were released.

Global Malaise

Hedge funds and other large speculators added dollar longs, or bets that the currency will rise, for an eighth week last week, including against the euro and the yen, the longest stretch since 2010. Net long dollar positions rose to 437,635 contracts in the week ended Aug. 11, the highest level since the period ended Feb. 3, according to the latest data from the Commodity Futures Trading Commission.

While a plunge in oil and a slowdown in China have aided the dollar in recent months against currencies of commodity-producing nations, global fragility may eventually spill over into the world’s biggest economy, according to JPMorgan Chase & Co.

“What you have is a dollar that’s really supported by the weakness in non-U.S. economies,” John Normand, the London-based head of foreign exchange and international-rates strategy at JPMorgan, said on Bloomberg Television. “It makes you question how much further this can go. As soon as the U.S. economy weakens in response to a stronger dollar, you’d see the dollar reverse.”

Dollar Repriced

Most Fed policy makers “judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point,” according to minutes of the July 28-29 Federal Open Market Committee session.

The Fed’s key rate has been in a range of zero to 0.25 percent since December 2008.

“The minutes showed a new degree of caution, and signaled that the Fed needs more information before it can be confident that inflation will return to target,” Jens Nordvig, a managing director of currency research at Nomura Holdings Plc., wrote in a research note. “We are seeing the dollar retrace in euro-dollar and dollar-yen, and since there is potential for the short end in the U.S.” yield curve “to reprice further, this impulse could extend further from here.”

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