A $1 Trillion Fund Doubts Dollar Rally Will Last

  • Amundi prefers to wager on strength in European currencies
  • Hedge funds boost dollar short positions to most in four years

Dollar Correction `Is on the Cards,' Analyst Says

Dollar skeptics are extending their bets outside the U.S., even as the greenback rallies.

Amundi SA, which oversees more than $1.1 trillion, prefers to wager on European currencies including the euro, while Schroder Investment Management Ltd. is putting its money into emerging markets. Eaton Vance Corp. in Boston says improving growth outside the U.S. could see the dollar resume weakening as it has for most of the year.

The U.S. currency rose for the first time in seven months in September as the Federal Reserve said an interest-rate increase in December was still on the table and President Donald Trump announced a plan to cut taxes. The greenback’s recovery has been closely correlated with Treasury yields, which have risen for the past three weeks.

“We expect U.S. 10-year yields to drift higher but not to move up sharply,” said Rajeev De Mello, head of Asian fixed income at Schroder Investment in Singapore. “If other countries, especially the growth-sensitive emerging economies, continue to benefit from the stronger global economy, the U.S. dollar should be weaker against them.”

At the heart of the debate over the dollar is lingering doubt over the Fed’s ability to keep raising rates into 2018 and investors’ preference for emerging markets and Europe over the U.S. as global growth gathers momentum. Hedge funds are skeptical about the greenback, with net short positions climbing to the highest since January 2013 at the end of last month, data from the Commodity Futures Trading Commission show.

While Treasury 10-year yields are set to climb to a range of 2.40 percent to 2.60 percent in the next 12 months, a global synchronized economic recovery will also boost bond yields elsewhere, making local currencies more attractive, said James Kwok, head of currency management at Amundi in London.

The company is neutral on the dollar, preferring to wager on gains in the euro, Sweden’s krona and Norway’s krone against Asian currencies, he said.

The Fed is likely to be more gradual in raising rates in 2018 than the pace indicated by its so-called “dot plot,” although it’s difficult to estimate what it will do given a number of Federal Open Market Committee members will be changed and it’s unclear if Chair Janet Yellen will be replaced, Schroder’s De Mello said.

Emerging-market currencies such as the Indonesian rupiah and Indian rupee are a better bet as they have high yields and will benefit from an improving global economy, he said.

The dollar isn’t going anywhere in a hurry, according to analysts’ forecasts. The Dollar Index, which tracks the U.S. currency against six major peers, will end the year at 93.1, little changed from current levels, according to the median estimate of a Bloomberg survey. The Bloomberg Dollar Spot Index fell 0.2 percent Wednesday, slipping against almost all its major peers.

For Macquarie Bank Ltd., the increase in dollar short positions may be paving the way for the dollar to extend gains, at least for the time being.

“The capitulation of dollar longs a month ago gives us a clean slate, and creates a backdrop that’s conducive to a new dollar rally,” said Gareth Berry, a foreign-exchange and rates strategist in Singapore. “But once central banks elsewhere become more hawkish in 2018, this will eat into the Fed’s lead, and should bring the dollar back to earth.”

Temporary ‘Correction’

Most of NatWest Markets’ clients in London see a year-end dollar rally as just a “correction in a longer-term downtrend,” said Mansoor Mohi-uddin, head of currency strategy in Singapore, who visited them last week.

Fund managers, including those who had been short dollars this year against the euro, expect a likely December Fed rate increase to signal the top for the U.S. currency this quarter, he said. Mohi-uddin sees the dollar staying in a range of $1.10 to $1.20 per euro for the first half of 2018.

Eric Stein, co-director of global fixed income at Eaton Vance, says the prospect of stronger economic growth around the world undermines the attraction of the greenback. The manager is betting on the Australian dollar’s advance versus its New Zealand counterpart.

“The story of the growth prospects outside the U.S. improving more than that of the U.S. could keep the dollar weakening, as it has for most of the year, although a change in U.S. fiscal or monetary policy could lead to dollar strength,” he said.

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