The Dollar Enters a Make-or-Break Week

  • Europe's central bank is forecast to add additional stimulus
  • U.S. payrolls report may guide Fed's meeting on Dec. 15-16

U.S. Climbs Path Back to 1990's 'Rubin' Dollar

Currency traders are gearing up for one of the busiest weeks of the year.

The European Central Bank is forecast to boost monetary stimulus, the Federal Reserve gets its last chance to scrutinize U.S. payroll data before its Dec. 15-16 meeting, and Fed Chair Janet Yellen appears before Congress. Those events may prove crucial for determining the path of the dollar, which is poised for its best month since July.

Investors are increasingly questioning how much further the U.S. currency can strengthen after appreciating almost 10 percent this year. The Bloomberg Dollar Spot Index is trading near its highest in data going back to December 2004, while Societe Generale SA’s Kit Juckes wrote in a client note on Friday that the currency is overvalued by some measures. At the same time, futures show traders continue to pile on dollar wagers amid speculation that the Fed will raise rates next month.

“The divergence trade has regained momentum and that’s encouraging the rebuilding of long dollar positioning,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The payrolls report should continue to show that employment growth is still expanding solidly in the U.S.”

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 peers, added 0.5 percent last week. The measure is set to rise 2.3 percent this month.

The U.S. currency was little changed at $1.0590 per euro as of 7:27 a.m. in Tokyo, after completing a two-week advance on Friday. The dollar was unchanged at 122.80 yen.

Big Week

European policy makers meet Dec. 3 to discuss monetary policy and what the ECB can do to prop up sluggish inflation within the region. The central bank is considering cutting its deposit rate further below zero and adding to its program of quantitative easing.

That contrasts with the U.S., where officials are edging closer to a rate increase as early as December. Yellen is scheduled to address the Economic Club of Washington on Dec. 2 and appear before a congressional committee on Dec. 3, a day before November jobs data are released.

American companies probably added 200,000 jobs this month, according to a survey of analysts compiled by Bloomberg. That would be down from 271,000 positions added in October, the most this year.

Greenback Wagers

Hedge funds and other large speculators increased net bets on the dollar to the most in three months in the week through Nov. 17, according to Commodity Futures Trading Commission data.

Juckes, a SocGen global strategist in London, said he expects dollar buying to continue into the Fed’s meeting, while he sees a big chance of a “significant correction” afterwards.

HSBC is also skeptical of the greenback’s strength. 

“I’m not sure that the dollar is your Black Friday bargain,” said Daragh Maher, head of U.S. foreign-exchange strategy at HSBC Holdings Plc in New York. “Having bought the rumor, you sell the fact. That should happen before the end of the year.”

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