Dollar Bulls Beat Bears in Futures for Longest Since 1999
Not since 1999 have currency traders been bullish on the dollar for so long, a sign that the market sees the U.S. resuming its role as the engine of global economic growth.
Futures anticipating a stronger dollar against its developed-market peers have outnumbered those predicting a drop for 26 consecutive weeks through the five days ended March 13, according to Commodity Futures Trading Commission data. That’s the longest streak since the start of a three-year rally in the world’s reserve currency 13 years ago.
While much of the 2.4 percent gain in the Dollar Index since 2009 has come from investors seeking safety from European debt turmoil and the global financial crisis, analysts now say expansion is trumping fear as a reason for buying U.S. assets. Growth in retail sales and jobs in the world’s biggest economy has damped expectations for more Federal Reserve stimulus that might debase the currency.
“The key message is that it’s not a flash-in-the-pan shift in sentiment, this seems to be something more structural,” Gareth Berry, a foreign-exchange strategist at UBS AG in Singapore said in a March 13 telephone interview. “The psychology around the dollar does appear to be changing and I’m confident that dollar strength will probably continue.”
Expectations for U.S. growth have diverged from the Group of 10 nations since December. America’s gross domestic product will expand 2.2 percent this year, according to the median forecast of 91 economists in a Bloomberg News survey, while developed nations increase 1.2 percent. The G-10 prediction is down from 2.5 percent in July, while the U.S. figure has stabilized near 2 percent.
“There’s substantial scope going forward for the dollar to recover a lot more,” Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi UFJ Ltd., said in a March 14 interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “One of the stories is this very, very significant dichotomy between the fundamentals in the U.S. and the fundamentals in Europe.”
IntercontinentalExchange Inc.’s Dollar Index (DXY), which tracks the greenback against the currencies of six major U.S. trade partners, fell 0.3 percent to 79.786 last week.
After the Australian dollar and the British pound, the U.S. currency is up the most in the past six months against its nine developed-nation counterparts, according to data compiled by Bloomberg. It has gained 1.5 percent, compared with the yen’s 9.3 percent drop and the euro’s 2.4 percent decline.
The dollar traded at $1.3241 per euro at 2:50 p.m. in New York from $1.3175 on March 16, and bought 83.39 yen from 83.43.
Berry expects the dollar to appreciate to $1.30 per euro in the next month and to $1.25 in three months, and the euro to trade at 106 yen by the end of the second quarter, UBS says.
Currency strategists have increased forecasts for the dollar against the euro and yen this year. The greenback will trade at $1.30 per euro, down from expectations of $1.45 in September, according to a Bloomberg News survey of 53 analysts. The dollar will trade at 87 yen next year, up from 83 yen forecast earlier this year.
Treasury bonds with yields higher than their German counterparts are luring foreign investors to U.S. debt. Two-year Treasuries yield 0.36 percent, 3 basis points more than similar- maturity German bunds. Six months ago, bunds were yielding 34 basis points more than Treasuries.
China (HOLDCH), the largest foreign U.S. creditor, increased its holdings of U.S. government securities in January for the first time in six months, boosting them by 0.7 percent to $1.16 trillion, Treasury data released March 15 show.
Organization of Petroleum Exporting Country members boosted net purchases of government debt by $43.3 billion, or 20 percent, in the 12 months ended Jan. 31, compared to a 13 percent rise for non-OPEC foreign holdings.
“Market players feel more comfortable holding U.S. dollars,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp. (BK), the world’s largest custodial bank, with more than $26 trillion in assets.
Traders’ positions reflect the shift. The difference in the number of wagers by all commercial futures traders on a gain in the dollar versus the euro, yen, pound, Swiss franc and the Canadian, Australian and New Zealand dollars -- so-called net longs -- was 143,884 on March 13, according to CFTC data compiled by Bloomberg. Net shorts, or bets the currency will fall, totaled 387,327 a year ago.
There have been more positive than negative contracts every week since Sept. 20, matching the stretch ending in July 27, 1999, which was seven months after the introduction of the euro. The Dollar Index rose 8.2 percent that year, 7.6 percent in 2000 and 6.6 percent the next year.
Another sign that the dollar is rising in reaction to a strengthening economy is that the typical relationship between the currency and stocks is breaking down.
During September 2008, as Lehman Brothers Holdings Inc. collapsed in the largest U.S. bankruptcy, the Dollar Index gained 6 percent and the Dow Jones Industrial Average slumped 34 percent as investors sought the currency to buy safe Treasuries. The next year stocks rallied 19 percent on optimism about an economic recovery while the currency gauge fell by 4.2 percent and Treasuries lost 3.72 percent as measured by Bank of America Merrill Lynch indexes.
The negative relationship between the dollar and stocks, intact since October 2008, is now breaking down, with the 60-day percent-change correlation rising to minus 43 percent last week from as low as minus 85 percent in December. A reading of minus 100 percent means that the two assets always move in the opposite direction.
The dollar has gained 1.3 percent this month and is down 0.5 percent so far this year, and the Dow Jones Industrial Average (INDU) rose to 13,289 March 16, the highest level since December 2007, and gained 8.3 percent in 2012.
“Typically when we see the Dow up, the dollar is down and that hasn’t happened,” said Woolfolk of Bank of New York Mellon. “That is a very significant development that’s happened rarely since the Lehman crisis.”
Stronger economic data this year damped market expectations of further monetary stimulus after the Fed bought $2.3 trillion of Treasuries and mortgage-backed bonds in two rounds of purchases known as quantitative easing from December 2008 to June 2011. During the second program, which started in November 2010, the Dollar Index fell 3.9 percent.
Sixty-one percent of respondents in a March 9-12 Bloomberg News survey of economists said Bernanke would refrain from any action to expand the Fed’s $2.89 trillion balance sheet this year. In January, 50 percent predicted more bond buying.
With unemployment at 8.3 percent, above the 10-year average of 6.6 percent, the Fed isn’t ruling out further moves. Strains in financial markets pose “significant downside risks” central bankers said in a statement after the March 13 meeting.
Possible further stimulus, as well as the Fed’s forecast of rates at zero to 0.25 percent through late 2014, will limit dollar gains, according to Jens Nordvig, a managing director of currency research in New York at Nomura Holdings Inc.
“In order to have a real pronounced dollar move we need to have an actual hiking cycle” for interest rates, Nordvig said in a March 14 telephone interview. “As long as we’re in an adjustment phase where U.S. growth expectations are being revised higher, the dollar can gain further in conjunction with risk assets doing OK.”
The currency has moved higher as U.S. economic data show a strengthening recovery. Employers in February added 227,000 jobs following a revised 284,000 gain in January and the jobless rate remained at a three-year low. Retail sales in February rose by 1.1 percent, the most since September.
Euro zone economies contracted 0.3 percent in the fourth quarter, while Japan shrunk 0.7 percent and the U.K fell 0.2 percent, according to government data.
Policy makers are trying to restore stability and ignite growth by flooding their financial systems with cash. European banks got 529.5 billion euros ($705 billion) in a second round of three-year loans from the European Central Bank on Feb. 29.
The yen has been the worst performing major currency this year, losing 8.5 percent against the dollar, as Bank of Japan (8301) Governor Masaaki Shirakawa indicated last week the central bank will keep using monetary policy as a tool to tackle deflation. The BOJ unexpectedly added 10 trillion yen ($128 billion) to its asset-purchase program on Feb. 14.
Foreign demand for U.S. assets and the increasing use of the euro as a funding currency for so-called carry trades have also helped support the dollar. Net buying of long-term equities, notes and bonds rose to $101 billion in January from $19.2 billion in December, the Treasury said March 15.
“Better U.S. data has helped the dollar versus the euro, sterling and yen,” Brian Kim, a currency strategist in Stamford, Connecticut, at Royal Bank of Scotland Group Plc said in a March 9 telephone interview. “It makes sense that it would be strengthening against those currencies because their central banks are in a bit of a different situation, their economic growth profile and outlook is in a different situation, so we see some advantage for the dollar against them.”
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