Hedge Funds Hold Back Amid Dollar’s Biggest Rally Since 2008

Updated on
  • Speculators barely raise net-long wagers on the greenback
  • Yen strengthens after reports of earthquake, tsunami warning

A Deep Dive Into Global Currency Markets

As the dollar charged toward its best gain since the global financial crisis, hedge funds held back.

Wagers among large speculators for the U.S. currency to rise against eight major peers climbed by only 15 contracts to a net 221,204 in the week through Nov. 15, according to data from the Commodity Futures Trading Commission. Bloomberg’s dollar index climbed the most since 2008 in the two weeks just past amid speculation U.S. President-elect Donald Trump’s reflationary economic policies will trigger higher interest rates.

The yen rose after Japan issued a warning for a possible three meter tsunami on the coast of Fukushima, home to the nuclear power plant destroyed by a March 2011 earthquake.

“Speculators are broadly not so bullish on the U.S. dollar,” said Janu Chan, a senior economist at St. George Bank Ltd. in Sydney. The rally since Trump’s victory “is more of a sugar kick,” and “the risk is that the U.S. dollar will top out soon.”

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, fell 0.4 percent as of 5 p.m. in New York after a two-week, 4.7 percent surge. The yen rose as much as 0.4 percent against the dollar before trading little changed at 110.82 yen.

Snapping Decline

The dollar has tracked Treasury yields higher as futures traders priced an interest-rate hike at the Federal Reserve’s Dec. 13-14 meeting as a near-certainty. BNP Paribas SA sees the dollar rallying to parity with the euro by the end of 2017, spurred by the diverging monetary policies of the European Central Bank and the Fed.

“In context of the magnitude of the moves we’ve seen over the last two weeks,” today’s euro rally “is quite a small bounce,” said Sam Lynton-Brown, a foreign-exchange strategist at the French bank in London. “We characterize it as a corrective move rather than a reversal of a trend driven by anything fundamental. The key driver of the euro is not politics but monetary policy divergence.”

Therefore, the dollar is likely to resume its advance, he said.

“Although the market is long dollars, it’s not an extreme long position, so there’s plenty of scope for investors to add to dollar-long positioning,” Lynton-Brown said.

— With assistance by Daisuke Sakai, Chiara Albanese, and Andrea Wong

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