'TINA' still driving hedge funds' bullish dollar view: McGeever



By Jamie McGeever

ORLANDO, Fla., May 16 (Reuters) - Being long dollars will no doubt become an overcrowded trade at some point and a reversal will ensue, but for hedge funds right now, there is no alternative.

Funds have amassed their biggest bet in six months that the dollar will strengthen against the world's major currencies, and you can understand why.

From widening interest rate and yield spreads, favorable relative growth prospects, and safe-haven flows amid exploding equity- and crypto-fueled market volatility, there are many factors behind the greenback's ascent to a 20-year peak.

The latest Commodity Futures Trading Commission data show that funds increased their net long dollar position against G10 currencies to $20.6 billion in the week to May 10 from $19.8 billion the week before.

That is the biggest net long position since early December last year. The bullishness is broad-based - funds are long dollars against all major currencies except the euro, and that short position is very small by historical standards.

A long position in an asset or security is effectively a bet that it will rise in value, and a short position is the opposite.

The dollar index, a measure of the greenback's value against a basket of major currencies, rose above 104.00 on May 9 for the first time since December 2002, lifted by the Federal Reserve's half-percentage-point rate hike and a pledge from Fed Chair Jerome Powell that further 50-basis-point moves are coming.

$6 BILLION BET AGAINST STERLING

Analysts at Goldman Sachs estimate that the dollar is over-valued by 18% but are cautious on calling for a correction, while analysts at Barclays note that the dollar looks stretched but raised their forecasts regardless.

"More expensive for longer," Barclays wrote on Monday.

There's a debate to be had about how much the Fed will ultimately tighten - the terminal rate implied by pricing on the Secured Overnight Financing Rate (SOFR) has fallen to 3% from almost 3.50% on May 4, the day of the Fed's policy decision - but most observers believe it will still be significantly more aggressive than its peers.

For example, the Bank of England also raised rates again this month, but warned of recession risks and the possibility of double-digit inflation. This was not what sterling wanted to hear, and its downdraft accelerated sharply.

CFTC funds have consistently been short the pound since mid-November, apart from the week before Russia invaded Ukraine in February. They have been short every week since - that bet is now worth more than $6 billion - and on Friday sterling hit a two-year low of $1.2155.

The European Central Bank is steering markets towards a likely rate hike in July, but the hawkish noises are being utterly drowned out by recession alarm bells. The euro's slide towards parity with the dollar is starting to worry ECB officials.

CFTC funds flipped back long euros in the latest week, a week-on-week position swing of almost $3 billion. But those longs will have been crushed by the currency's slump to as low as $1.0350.

Derek Halpenny at MUFG reckons the euro's 2017 low of $1.0340 is the last line of defense before $1.00 and the first time at parity since 2002. If hedge funds are thinking along the same lines, they may might be flipping to a net short euro position soon enough.

Related columns:

Stirring ingredients of 1985's dollar-capping Plaza Accord (Reuters, May 11)

Sterling tailspin as BoE maps 10% inflation and recession (Reuters, May 6)

Fed fingers crossed for 1994 re-run as hiking path shortens (Reuters, May 5)

Fraying central bank consensus spurs dollar and market stress (Reuters, May 4)

(The opinions expressed here are those of the author, a columnist for Reuters)



CFTC dollar positions & dollar index Link
CFTC net dollar position & dollar index Link
CFTC sterling positions Link



By Jamie McGeever
Graphics by Saikat Chatterjee, Joice Alves and Karen Brettell
Editing by Paul Simao

Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.

All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.

Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.

We are using cookies to give you the best experience on our website. Read more or change your cookie settings.

Risk Warning: Your capital is at risk. Leveraged products may not be suitable for everyone. Please consider our Risk Disclosure.