Dollar Longs the New Pain Trade as Evans's Nervousness Spreads

  • Speculative wagers on dollar’s gain stand near record high
  • `Focus will be on Fed Chair Yellen’s speech tonight': ANZ

Federal Reserve Bank of Chicago President Charles Evans’s nervousness about the U.S. economy’s capacity to overcome higher interest rates is spreading to dollar bulls.

A gauge of the greenback fell the most in almost two weeks Tuesday after Evans, a 2015 voter on the policy-setting Federal Open Market Committee and among the most dovish of central bank officials, reiterated in a speech in East Lansing, Michigan, that he expects interest rates to stay below 1 percent by the end of next year. His comments, suggesting the pace of increases may be even more gradual than investors anticipate, precede a speech by Fed Chair Janet Yellen Wednesday.

“We know that the leveraged community is very long dollars, so the inevitable position reduction” weighed on the currency, said Khoon Goh, a Singapore-based senior foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. “The focus will be on Fed Chair Yellen’s speech tonight. I expect her to say December liftoff is still on the table, but the pace of tightening will be gradual, but data dependent.”

The dollar rose 0.1 percent to $1.0624 against the euro as of 11:57 a.m. in Tokyo, after touching a seven-month high of $1.0558 Monday. The U.S. currency bought 122.99 yen after falling 0.2 percent to 122.87 in New York, The Bloomberg Dollar Spot Index was little changed at 1,234.17 after sliding 0.4 percent Tuesday, its biggest daily loss since Nov. 19.

‘Much Faster’

Employment data due Friday will provide more clues on the strength of the economy after a report Tuesday showed U.S. manufacturing unexpectedly contracted in November to the lowest level in six years even as a jobs gauge was a bright spot. Economists in a Bloomberg survey project a 200,000 increase for last month after a 271,000 gain in October.

“The Fed wants to shift focus to the pace of rate increases, but markets are highly likely to have priced in a pace that’s much faster than the Fed is suggesting,” said Masato Yanagiya, head of foreign-exchange and money trading at Sumitomo Mitsui Banking Corp. in New York. “The ISM was shockingly bad, but its employment index is rising, boosting expectations for Friday’s jobs data.”

Hedge Funds

The difference in the number of contracts by hedge funds and other large speculators that profit from a rise by the dollar versus eight of its major peers compared with those that gain from a loss was 428,298 as of Nov. 24, up from  411,208 a week earlier. That’s approaching January’s record of 448,675 contracts.

Futures indicate a 70 percent chance the Fed will raise its benchmark rate at the Dec. 15-16 FOMC meeting, data compiled by Bloomberg show. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase, compared with the current range of zero to 0.25 percent.

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