Are Markets Positioning for a Bout of Dollar Bashing?
Currency speculators have turned bearish towards the U.S. dollar for the first time in a year, latest market positioning data show. This is a sign that the greenback could fall in the weeks ahead, especially if expectations for further monetary easing in the U.S. grow, analysts say.
The value of the U.S. dollar’s short position in currency markets stood at $441.7 million in the week to August 28, compared with a net long position of $4.57 billion in the previous week, data released on Friday by the Commodity Futures Trading Commission showed.
This was the first time since early September last year that the market has held a net short dollar position, effectively a bet that the U.S. currency is headed lower.
Mitul Kotecha, Head of Global Currency Research at Credit Agricole, says the bank’s own data shows the market has held a net short position for the U.S. currency against other major currencies for two weeks now.
“Sentiment is turning against the U.S. dollar and this is consistent with markets expecting more quantitative easing (QE). There has been a shift in the debate from what it would take for the Fed to embark on more QE to what would really stop QE,” Kotecha said, adding that a key speech by Federal Reserve Chairman Ben Bernanke last week reinforced that view.
In a widely-anticipated speech at the Fed’s annual symposium in Jackson Hole on Friday, Bernanke said the U.S. central bank would provide additional policy accommodation “as needed,” suggesting that the Fed could deliver another round of asset purchases or quantitative easing to boost economic growth.
The U.S. dollar index, which measures the dollar’s value against a basket of major currencies, is up about 3 percent in the year to date. It has however, slipped one percent from a peak hit in July.
“As we move into this week, the markets are likely to remain short the dollar because of hopes for policy moves from the European Central Bank,” said Perry Kojodjojo, Currency Strategist at HSBC in Hong Kong.
The market is hoping the ECB would provide further information on its possible bond purchasing program particularly given government bonds of peripheral euro zone states have come under pressure in recent months. Positive action from the ECB should help underpin the euro and lift the single currency to $1.35 by the end of the year, Kojodjojo said. That would represent a gain of more than 7 percent from current levels.
Kotecha at Credit Agricole said that while sentiment had turned against the U.S. currency a large drop in the dollar was unlikely and signs of increased risk aversion were likely to lend the dollar some support.
Patrick Bennett, FX Strategist at CIBC, said he believed the dollar should be trading higher against the currencies of the world’s top 10 economies.
Talking about the market positioning data on CNBC’s “Capital Connection,” Bennett said: “We’re quite constructive on the dollar, at least on a G-10 basis, and we think the dollar should be stronger, certainly against Europe, just looking at growth in the economies.”
- By CNBC's Dhara Ranasinghe