Dollar’s 4-Week Selloff May Reverse, Citigroup’s Cochinos Says

A four-week surge in sales of dollars by hedge funds and non-leveraged investors may be coming to an end amid speculation the trend has gone too far, too fast, according to Citigroup Inc.

Proprietary data from Citigroup on currency flows show the intensity of the dollar-selling decreased over the past week, Richard Cochinos, a currency strategist in New York at the company, wrote in a client report. The level of selling over the past month has previously been reached in large U.S.-risk events such as the fiscal cliff of spending cuts and tax increases at the end of last year, he wrote.

“We’re not in a massive U.S. risk environment or having massive real money go to emerging markets,” Cochinos said in an interview. “If hedge funds and real money investors are heavily sold, and they don’t have a huge incentive to sell much more from here on out, then it has to be that the dollar will start strengthening in a week or two going forward.” “Real-money investors” are those who aren’t leveraged.

Options traders are bullishly positioned on the dollar. The premium on options granting the right to sell the euro against the U.S. currency relative to those allowing for purchases increased to 0.94 percentage point today, the one-month so-called 25-delta risk-reversal rate for the pair showed. The figure was 0.54 percentage point on July 22, the least since February.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trade partners, increased 0.3 percent to 81.35 today in New York. It was the gauge’s second day of gains after five days of losses. It closed at 84 on July 10 after reaching 84.75 the previous day, the highest since July 2010.

“If hedge funds shift from dollar selling to outright dollar buying, there’s no reason in a month or two, once we get into the fall, that you couldn’t begin to see 84 or higher again for the Dollar Index,” Cochinos said.

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