Dollar bulls undeterred as warning signs flash on greenback gain

TORONTO — The dollar erased its 2016 loss versus the euro and the outlook for higher relative interest rates may prove strong enough for the greenback to overcome historical patterns that signal its gains are overdone.

The United States currency rose for a third week on renewed bets among investors and traders that the Federal Reserve will find the scope to raise rates by December. At the same time, European Central Bank (ECB) president Mario Draghi sought to put a halt to speculation that monetary stimulus will be tapered anytime soon, helping extend the dollar’s rally versus the euro and pushing its relative strength against the shared currency beyond levels that often signal an impending reversal.

The dollar has been on the rise since the middle of August as signals of faster economic growth and accelerating inflation fuelled bets for US monetary tightening. Meanwhile, the euro has been under pressure from the accommodative policies of the ECB, as well as numerous political risks ranging from post-Brexit fallout to a migration crisis to a referendum that may topple Italy’s government.

“The Fed offers the market some comfort to be long dollars ahead of a hike,” said Mr Vassili Serebriakov, a foreign-exchange strategist at Credit Agricole CIB in New York. “I don’t see what will change the dollar’s momentum for now, so it has scope to extend further.”

The dollar added 0.8 per cent last week to US$1.0884 per euro, leaving the greenback up 0.2 per cent for the year. The currency was down more than 5 per cent as recently as May. The Bloomberg Dollar Spot Index, which tracks the dollar against 10 major peers, rose 0.1 per cent last week, paring its loss this year to 2.1 per cent.

The dollar reached a seven-month high last week after US retail sales data bolstered the case for higher interest rates this year. Futures show a 68 per cent chance the US central bank will raise rates by year-end, up from 61 per cent a month ago, based on the assumption that the effective fed funds rate will trade at the middle of the new Federal Open Market Committee (FOMC) target range after the next increase.

Hedge funds and other large speculators held net-bullish futures positions on the dollar near the highest levels since February, according to the Commodity Futures Trading Commission. Bets that the currency will rise versus eight major peers outnumbered bearish wagers by 195,402 contracts in the week through Oct 18.

“We do anticipate the bias towards US dollar longs to continue over the next few weeks,” said Mr Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “Mr Draghi is not unhappy for the euro to cheapen a little further.” Bloomberg