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“The U.S. growth story is the best story out there” among the Group of 10 nations, Callum Henderson, the global head of foreign-exchange research at Standard Chartered Plc in Singapore, said by phone on Sept. 24. “The U.S. dollar remains fundamentally cheap.”
Gross domestic product in the U.S. expanded last quarter at the
fastest pace since 2011, compared with little or no growth in the euro zone and Japan, where central banks are maintaining or expanding monetary stimulus. The Federal Reserve is going in the opposite direction, preparing to raise interest rates next year, a decision that would make dollar-denominated debt even more attractive to yield-starved international investors.
Against a basket of the euro, yen, pound and six other developed-nation currencies, the greenback has gained 7.3 percent this quarter and 6 percent for the year -- the best performance in the group for either period, according to data compiled by Bloomberg. Strategists are having a hard time keeping up, with the dollar now stronger than strategists’ year-end estimates versus every major peer.
Rising Bets
Hedge funds and other large speculators have about the most bets on record that the dollar will keep rising, data from the Commodity Futures Trading Commission in Washington show. Net longs totaled 238,056 contracts last week, or about $35.1 billion, and approaching the record 311,052 contracts in June 2012. In July, positioning showed net bets against the dollar.“This quarter marks the turning point in the cycle,” Paresh Upadhyaya, Boston-based director of currency strategy at Pioneer Investment Management Inc., which oversees $248 billion, said in a phone interview Sept. 25. “It really makes people ask the question: ‘is the Fed now getting ready to pivot?’”
The dollar climbed 0.2 percent today to $1.2706 per euro as of 7:45 a.m. in New York, and was little changed at 109.35 yen. Those levels are stronger than the median year-end forecasts in Bloomberg surveys of $1.29 per euro and 108 yen.
Too Much?
The extreme investor positioning in the dollar is leading strategists to wonder whether the U.S. currency is becoming over-extended.
Kit Juckes, a global strategist at Societe Generale SA in London, said in a note today that the dollar is “overbought,” with its gains “in dire need of some pause and possibly a correction.” The yen exchange rate is most vulnerable to a reversal should investor appetite for risk deteriorate, he said.
John Hardy, the head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark, agrees, and said today the key drivers of the dollar will be Thursday’s European Central Bank policy meeting and U.S. jobs data the following day.
The dollar’s appreciation has already prompted Fed officials to voice concern it will have a negative impact on the U.S. economy. A too-strong currency may hurt the Fed’s goal to spur growth and avoid disinflation, New York Fed President William C. Dudley said on Sept. 22.
“Of the different groups in GDP, a stronger dollar does make it more difficult for exporters,” Jennifer Vail, head of fixed income at U.S. Bank Wealth Management in Minneapolis, said in a Sept. 24 phone interview. “But so much of our GDP is domestic consumer-driven, it’s the possibility of imported deflation that’s a greater concern with a strong dollar.”
Trade Deficit
The Commerce Department in Washington will say this week the monthly trade deficit held at about $40.8 billion in August, according to the median estimate of about 60 economists surveyed by Bloomberg.GDP grew at a 4.6 percent annual rate in the second quarter, and is forecast by economists to expand 3 percent next year. That compares with 2015 estimates of 1.3 percent for the euro area and 1.2 percent for Japan. The U.S. jobless rate held at a six-year low of 6.1 percent in September, according to economists polled before an Oct. 3 report.
Almost all of the dollar’s gains have taken place since the start of July as Fed officials began to discuss a plan to stop expanding the money supply next month and raise interest rates in 2015. The greenback has appreciated versus all 16 major currencies tracked by Bloomberg this quarter, ranging from a 2 percent advance against Taiwan’s dollar to an 11.4 percent surge against New Zealand’s.
Fed Tightening
Researchers from the Fed Bank of San Francisco issued a report this month indicating investors may be underestimating the pace of monetary tightening. At their Sept. 16-17 meeting, Fed officials increased their estimate for the federal funds rate to 1.375 percent at the end of next year, versus June’s prediction of 1.125 percent.The 6.5 percent gain this quarter in the Bloomberg Dollar Spot Index, which measures the performance of the greenback against a basket of 10 leading global currencies, is the biggest since the three months ended September 2008.
The prospect of higher benchmark rates is pushing U.S. bond yields higher, enhancing their appeal to international investors. Treasury two-year notes yield 0.64 percentage point more than similar maturity German bunds, the largest difference since 2007. The difference in 10-year notes expanded to 1.57 percentage points this month, the most since 1999.
As the Fed cuts its balance sheet, below-target inflation and growth have led the ECB to step up its debt purchases. The Bank of Japan is still buying 60 trillion ($548 billion) to 70 trillion yen a year of bonds to stave off deflation.
“We’re going through an extraordinary run here for the dollar,” Alan Ruskin, Deutsche Bank AG’s global head of G-10 currencies in New York, said in a Sept. 26 phone interview. “We certainly have this divergence story materializing in the data as well, where Europe seems to have lost momentum and the U.S. has gained momentum.”
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