Dollar Poised for First Monthly Decline Since August Versus Euro

  • Hedge funds cut bullish-dollar positions for second week
  • Bloomberg survey signals greenback peak of $1.04 per euro

The dollar is on pace for the first monthly decline since August as investors bet the Federal Reserve will wait until at least April to raise interest rates again after last week’s liftoff from near zero.

Hedge funds reduced futures bets for a second week that the dollar will advance against the 19-nation currency, in the last positioning data available before the U.S. central bank raised its target for the first time in almost a decade on Dec. 16.

The dollar is up against almost all major currencies this year as investors prepared for Fed liftoff while other central banks added stimulus. Yet U.S. policy makers have emphasized that they’ll stick to a gradual pace of increases to assess the economy’s response to higher borrowing costs and as commodity prices tumble. 

"We’re pretty close, I think, to the bottom in euro-dollar, and the bottom seems to be $1.05," said Greg Anderson, global head of foreign-exchange strategy in New York at Bank of Montreal. "It’s year-end pain trades” that are undermining the dollar Monday, as investors exit bullish bets, he said.

Dollar Longs

The U.S. currency fell 0.4 percent to $1.0915 per euro at 5 p.m. New York time, extending this month’s losses to 3.3 percent. The dollar’s depreciated 1.6 percent in December to 121.19 yen.

While the greenback is still up about 11 percent against the euro in 2015, it hasn’t been able to surpass $1.0458, a 12-year high reached in March. The dollar will peak at around $1.04 next year, according to the median estimate in a Bloomberg survey of strategists.

Hedge funds and other large speculators reduced net futures positions that profit from gains in the dollar versus the single currency to 159,961 contracts as of Dec. 15, from 172,331 contracts a week earlier, according to Commodity Futures Trading Commission data. In early December, bullish bets on the dollar were the strongest since May.

The commitment to “gradual” tightening means rates may be raised at every other meeting, matching officials’ forecasts for four increases in 2016, Fed Bank of Atlanta President Dennis Lockhart said Monday.

Traders are pricing in a slower pace. The probability that the Fed raises its benchmark rate by the April meeting is about 52 percent, according to data compiled by Bloomberg based on futures. Policy makers increased the rate to a range of 0.25 percent to 0.5 percent this month after keeping it near zero since 2008.

“The market has taken on board the word ‘gradual’” on the Fed’s rate trajectory, said Jane Foley, a senior currency strategist at Rabobank International in London. With the Fed on course to tighten policy, “the dollar will outperform but I don’t think it will be steaming ahead."

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