Dollar Rides With Higher Yields on Fed as Gundlach Casts Doubt

  • Hedge funds boost bullish bets as odds of Fed rate hike rise
  • Fund manager cites greenback falls after central-bank moves

The strengthening dollar is rattling traders in the $5.1-trillion-a-day currency market who were all but certain a Federal Reserve interest-rate increase wasn’t in the cards.

The greenback climbed versus all its major peers Friday, paring a weekly loss and invigorating forecasters who predicted the dollar will strengthen by year-end. Hedge funds added to net bullish futures positions by the most since June. Yet DoubleLine Capital LP’s Jeffrey Gundlach said the popular view that Fed tightening causes the dollar to rally is wrong and the U.S. currency may break to the downside.

"The dollar would rally on the surprise of a rate hike, but the follow-through reaction would be disappointing," said Alan Ruskin, global co-head of foreign-exchange research in New York at Deutsche Bank AG, the world’s fourth-biggest currency trader according to Euromoney magazine. Policy makers "are well capable of signaling that this is still consistent with a very gradual policy tightening cycle."

The dollar has weakened this year as the Fed scaled back expectations for rate increases. Central-bank wagers were revived Friday when Fed President Eric Rosengren joined a litany of speakers saying an increase is still on the table. Traders will look to Fed Governor Lael Brainard’s speech in Chicago on Sept. 12 for more clues.

The Bloomberg Dollar Spot Index, which tracks the currency against a group of major peers, rallied Friday, paring its weekly loss to 0.3 percent. The dollar rose 0.7 percent this week to $1.1233, while losing 1.2 percent to 102.69 yen.

The greenback will strengthen to $1.09 per euro and 104 yen by the end of the year, according to the median forecasts in a Bloomberg survey of analysts.

Futures Positions

Hedge funds and money managers increased net-bullish futures positions on the dollar versus eight major currencies in the week ending Sept. 6, according to the Commodity Futures Trading Commission. Net bets that the currency will rise climbed by 50,150 contracts to 119,066 contracts.

Gundlach, manager of the $61.7 billion DoubleLine Total Return Bond Fund, said yields are likely to rise, reflecting changing sentiment in the bond market. Increased chances for a Fed rate increase and escalating concern that central bankers in Europe and Japan are reconsidering the efficacy of extending monetary stimulus sent yields higher Friday.

"In the last several hiking cycles, when the Fed started to hike, the dollar actually weakened," Los Angeles-based Gundlach said during a webcast Sept. 8. He didn’t offer a specific forecast.

Futures pricing indicated a 30 percent chance of tighter policy this month, according to data compiled by Bloomberg. The probability of a move by year-end was 60 percent. The calculations assume the effective fed funds rate will average 0.625 percent after the central bank’s next boost.

“Rosengren, usually in the dovish spectrum of the committee, delivered a more hawkish-than-expected speech, which is pushing the dollar up,” said Andres Jaime, a foreign-exchange and rates strategist at Barclays Plc in New York.

— With assistance by Lananh Nguyen

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