Dollar Bears' Case Grows as Wagers on Fed Hikes Fade

  • Hedge funds, other speculators winning with net-short stance
  • ECB meeting this week may sustain the trend, Mizuho says

State Street's Graf Says Markets Really Doubt the Fed

The dollar’s deepening slide is making a winner of hedge funds and other speculators who are the most bearish in four years.

The greenback sank to a 10-month low Friday, rounding out its worst week since May, as weaker-than-forecast economic data raised doubts about the prospect of additional Federal Reserve tightening this year. Analysts at banks including Mizuho and Wells Fargo say the dollar’s got further to fall as Thursday’s European Central Bank meeting approaches.

The euro got a lift last week from news that ECB President Mario Draghi will attend a Fed symposium in August, which spurred bets that he might use the occasion to signal plans for the bank’s bond-buying program. Last week also offered a stark reminder of the growing conviction that other central banks will start catching up to the Fed, as the Bank of Canada’s first rate hike in almost seven years spurred a surge in the loonie.

“The bias is going to be on the weaker side given the weakness of the data and the expectation of the ECB sounding a bit more hawkish,” said Sireen Harajli, a foreign-exchange strategist at Mizuho Bank Ltd. in New York. If that happens, the dollar could weaken to $1.16 per euro from about $1.1470 Friday, she said.

The U.S. currency slid against all of its major peers last week, coming under pressure as inflation and retail sales data missed expectations. The dollar’s chances of rising against the euro by year-end have plunged to 4 percent, compared with about 40 percent in January, options markets imply.

Options traders see plenty of upside for the euro: The total notional amount of large euro calls bought last week was about seven times the tally for euro puts, according to DTCC data.

Hedge funds and other speculators boosted net-short bets on the dollar last week to the most since February 2013, data from the Commodity Futures Trading Commission show.

The latest inflation figures led traders to reduce expectations for more Fed hikes. The probability implied by fed funds futures fell to 45 percent for the December meeting, from 66 percent on July 5, based on the current effective fed funds rate and the implied futures rate.

“We see trend weakness in the greenback,” said Erik Nelson, a currency strategist at Wells Fargo in New York.

Here’s what to watch in the week ahead:

July 17Empire Manufacturing
July 18Import Price Index
Export Price Index
TIC Flows
July 19MBA Mortgage Applications
Housing Starts
Building Permits
July 20Initial Jobless Claims
Philadelphia Fed Business Outlook
Leading Index
ECB Decision

— With assistance by Alex Harris, and Robert Fullem

(In story originally published July 16, corrects description of how rate-hike probabilities are derived in penultimate paragraph.)
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