• Greenback erases 2016 advance on signs of economic slowdown
  • Deutsche Bank, BofA, BNP Paribas see gains, note challenges

DoubleLine Capital’s Jeffrey Gundlach sees the dollar weakening this year, challenging an increasingly fragile consensus that the greenback is headed higher, after its worst week versus the yen since July 2009.

Gundlach, who oversees the $54.7 billion DoubleLine Total Return Bond Fund, bought currencies other than the dollar in his diversified funds for the first time in five years last month, he said at an event in Beverly Hills, California, on Friday. The euro is likely to strengthen against the dollar as the probability the Federal Reserve will increase borrowing costs at its March meeting is virtually zero, and only 50 percent for the rest of the year, he said.

Jeffrey Gundlach
Jeffrey Gundlach
Photographer: David A. Grogan/CNBC/NBCU Photo Bank via Getty Images

“The dollar will fall in 2016,” said Gundlach, whose fund has returned 1.5 percent this year, outperforming 79 percent of its peers. It’s “wrong, wrong, wrong” to think the dollar will get stronger when the Fed raises rates, he said, adding “Guess what, the Fed did raise rates in December, and the dollar fell.”

The popular bullish dollar trade of the past two years has lost momentum, with a gauge of the currency erasing all of this year’s gains as traders push out expectations for rate increases in the U.S. Signs of wage growth in a payrolls release Friday couldn’t offset a shadow cast by reports earlier this week that showed weaker services industries, which account for about 90 percent of the economy.

The U.S. currency lost 3.5 percent this week to 116.87 yen, the largest decline since the five days ended July 10, 2009. It fell 3 percent to $1.1158 per euro. The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, fell 1.9 percent from a week earlier.

Hedge funds and other large speculators reduced net wagers on dollar strength versus eight major peers to 265,159 contracts in the week through Feb. 2, the lowest level since November, data from the Commodity Futures Trading Commission show.

Dollar Rally

The dollar has advanced about 20 percent since the middle of 2014 on speculation the Fed will boost rates while the rest of the world eases. The greenback is forecast to strengthen further versus 13 of its 16 major peers by year-end. 

Deutsche Bank AG, the world’s second-largest currency trader, Bank of America Corp. and BNP Paribas SA have all reiterated forecasts for the U.S. currency to gain this year, while noting hurdles and a potentially uneven upward path.

“We thought there’d be a tactical correction in the dollar as the market prices out the Fed, and that’s certainly been the case,” said Calvin Tse, the co-head of U.S. currency strategy for Morgan Stanley in New York. “We can see a little more room for corrections, but we think it just provides better levels to enter medium-term trades,” he said, adding he remains bullish on the dollar.

Dollar bulls ended this week on a high note with better-than-forecast wage data in the Labor Department’s monthly payrolls report, even as the number of jobs added fell to the lowest in four months. U.S. retail sales likely grew 0.1 percent in January, after falling 0.1 percent a month earlier, according to the median estimate of analysts before a report due Feb. 12.

“The payrolls weren’t strong so it doesn’t make everything fine, but it brings the Fed back into play, because of the wages,” said Lee Ferridge, the Boston-based head of macro strategy for North America at State Street Global Markets. “Retail sales takes on a prominence because, if that’s a weak number, the consumer’s slowing, manufacturing’s slowing, services are slowing.”

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