Hedge funds and forex dealers are betting record amounts against the dollar, reflecting a growing belief that the U.S. currency has lost its haven appeal and that euro zone interest rates will soon rise.
As the crisis in the Middle East has worsened, the latest exchange data show that traders are selling “short” the currency. The big U.S. fiscal deficit and concerns about the effect of rising oil prices have been blamed by some for the dollar’s slide.
Figures from the Chicago Mercantile Exchange, which are often used as a proxy for hedge fund activity, showed that short dollar positions surged from 200,564 contracts in the week ending February 22 to 281,088 on March 1.
This meant that the value of bets against the dollar on the CME rose $11.5 billion in the week to March 1 to $39 billion, $3 billion more than the previous record of $36 billion in 2007.
In contrast, speculators have added to their euro holdings amid expectations that the European Central Bank will soon raise interest rates to head off rising inflation.
Jean-Claude Trichet, ECB president, said last week that “strong vigilance” was warranted, a phrase used throughout the bank’s 2005-08 rate-tightening cycle to pave the way for a rate increase at the next governing council meeting. That strengthened the market view in financial markets that the ECB could raise rates at its April meeting and the euro last week rose to a four-month high of $1.3997 against the dollar, taking its gains from a 16-week low of $1.2871 in January to nearly 9 percent.
“Dollar bears have become a marauding horde,” said David Watt, analyst at RBC Capital Markets. Given the continued losses for the dollar this month, he said it was likely that investors had since added to their bets against the U.S. currency, short of an “absolutely stunning” reversal in sentiment.
“We may be seeing a turn in the longer-term outlook for the dollar – for the worse,” said Kit Juckes, head of FX strategy at Société Générale. He said the U.S. Federal Reserve was likely to react more dovishly to a supply-side inflationary shock caused by rising oil prices than other central banks.
The figures showed that speculators on the CME had raised the value of their bets that the euro would rise against the dollar to $8.8 billion, the largest since January 2008, in the week to March 1.
The data confirm the sharp turnaround in sentiment towards the single currency from speculative investors, who as recently as January were betting on losses for the single currency on worries over the euro zone sovereign debt crisis.
Analysts said the prospect of ECB monetary tightening was outweighing investors’ concerns over the euro zone’s fiscal problems.
Indeed, since March 1, it is likely that speculators added to their long euro positions. Beat Siegenthaler, forex strategist at UBS, said further gains for the euro against the dollar were likely given that other investors, such as pension funds and asset managers, had not yet joined short-term, leveraged investors such as hedge funds in adjusting their bets against the single currency.
“Clearly some asset managers, presumably the more speculative in orientation, joined hedge funds in putting on long euro exposure, but on a longer view, asset managers remain significantly short and private clients have not even started to turn round their bearish euro positioning,” Mr Siegenthaler said.
He said an April interest rate rise from the ECB could therefore boost the single currency as these investors turned their positions round.
“For real money investors, the ECB decision could mean more euro buying over the medium term,” he said. “Longer-term positioning still looks short the euro.”