Dollar Bulls Practicing Art of Stealth Capitulation

Strategists are cutting their forecasts on the dollar while still insisting the rally they’ve been denied all year is just around the corner.

Year-end predictions for the benchmark U.S. Dollar Index have dropped to 83.6 from 86.7 in January as the greenback defied estimates and weakened. The bulls remain optimistic, foreseeing an almost 5 percent advance in the index by year-end, while Barclays Plc declared it’s time for the currency to “shine.”

The International Monetary Fund to the Federal Reserve are downgrading estimates for the U.S. economy after it shrank in the first quarter by the most in five years. Fed Chair Janet Yellen said last month that policy makers remain committed to low interest rates for a “considerable time,” a setback for traders who’d bet borrowing-cost increases would boost the currency.

“The key point is that growth disappointed dramatically in the first quarter,” Steven Saywell, the global head of foreign-exchange strategy at BNP Paribas SA in London, said in a phone interview yesterday. “We’re expecting a pickup from the contraction in the first quarter” with “much stronger” growth in the rest of 2014, he said.

Monthly Cuts

BNP Paribas forecast in December that Intercontinental Exchange Inc.’s U.S. Dollar Index would climb to 86.5 by mid-year, data compiled by Bloomberg show. Instead, it was little changed at 80.21 as of 12:31 p.m. in New York, compared with 80.04 at the end of 2013. The French bank now forecasts an advance to 84 by year-end, and favors betting on the dollar against the euro, Swiss franc and yen, Saywell said.

The median prediction in Bloomberg’s strategist survey for an increase to 83.6 by end-2014 is down from estimates of 84.2 in May, 85.6 in March and 86 in February.

Dollar estimates dropped along with U.S. economic forecasts. The IMF reduced its prediction for 2014 growth last month to 2 percent, from 2.8 percent in April, while the Fed cut its forecast to a range of 2.1 percent to 2.3 percent on June 18, from 2.8 percent to 3 percent in March.

“If you start getting some visibility on rate hikes, that that’s actually going to take place, then that’s when the dollar starts to perform,” Robert Sinche, a global strategist at Stamford, Connecticut-based brokerage Pierpont Securities LLC, said July 1 in a phone interview.

Rate Speculation

Barclays strategists led by Jose Wynne in New York said in a report last month that “conditions finally seem right for the USD to outperform,” as reduced labor-force participation and workers with inadequate skills means the jobs market is tighter than the Fed anticipated. That may spur inflation and drive the currency to gain “gradually” against most of its 20 major peers, Barclays said.

The Fed has held its benchmark rate target at zero to 0.25 percent since December 2008 as inflation, measured by its preferred gauge, averaged 1.4 percent, below its 2 percent target. Inflation rose 1.8 percent in May from a year earlier, the biggest 12-month increase since October 2012.

The Commerce Department said June 25 that U.S. gross domestic product shrank an annual 2.9 percent in the first quarter, the most since 2009. That contrasts with data showing companies added 281,000 workers to payrolls in June, the most since November 2012, the ADP Research Institute said yesterday.

‘Underlying Strength’

“The GDP numbers are seriously misleading -- I think there’s much more underlying strength,” Alan Ruskin, the global head of Group of 10 foreign exchange at Deutsche Bank AG in New York, said in a phone interview on July 2. “If unemployment starts to fall below 6 percent, policy is going to look extraordinarily easy in the context of even inflation numbers at current levels.”

Employers added more workers than projected in June and the unemployment rate fell to an almost six-year low of 6.1 percent. The addition of 288,000 jobs followed a 224,000 gain the prior month that was bigger than previously estimated, Labor Department figures showed today in Washington.

While strategists maintain their dollar optimism, hedge funds and leveraged investors have given up on the currency. After reaching a bullish peak in January, net futures positions betting on gains in the greenback versus eight major currencies have been liquidated, reaching a net bearish position on April 8, according to CFTC data.

Net bearish dollar positions stood at 18,917 contracts as of June 24, compared with a 2014 peak net bullish wager of 241,987 contracts on Jan. 21.

“Due to the disappointment in the growth outlook, and accompanying yield support, most investors were forced out of these trades or gave up on them,” said Saywell of BNP Paribas. “Our survey now tells us the market is more or less flat dollars. So there is very little risk of position capitulation and there is significant potential to build dollar longs if an appreciation trend emerges, as we expect.”

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