The dollar rebounded from a 20-month low against the euro on speculation that traders will pare near- record bets on the currency's decline as the US maintains higher interest rates than Japan or Europe.
A report from a US futures regulator on Friday showed a jump in investors betting on the dollar's drop, known as holding short positions. The data is sometimes used as a contrary indicator. Charts that traders use to predict price movements also suggested the US currency's 1.9% decline last week was excessive. “The markets became very short the US currency,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities in Tokyo. “There's a risk for further dollar gains” to 115.80 yen and $1.3310 per euro today, he said. The dollar traded at $1.3324 per euro at 12:28 p.m. in Tokyo compared with $1.3336 in late New York on December 1. The US currency traded at 115.58 yen from 115.44. Futures traders increased their bets that the euro will gain against the dollar, figures from the Washington-based Commodity Futures Trading Commission showed December 1. The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop was 89,594 on Nov. 28, compared with 65,306 a week earlier. The record was 92,108 on the week of Aug. 11 this year. The 14-day relative strength index for the euro against the dollar was 81.2, close to a six-month high reached on December 1. A level above 70 is a signal that gains have been too rapid.
The dollar earlier weakened to the 20-month low against the euro on speculation US debt securities will become less attractive as the Federal Reserve cuts interest rates and the European Central Bank raises borrowing costs. The US currency slumped last week as the yield premium on 10-year Treasuries over similar-maturity German debt narrowed to 77 basis points, a 17-month low. A report today will probably show producer-price inflation in the 12 euro nations rebounded in October, adding to pressure on the ECB to raise rates. “The US dollar is in all sorts of trouble,” said Sue Trinh, a currency strategist at RBC Capital Markets in Sydney. “The ECB has more work to do beyond a hike this week, while it's a question of timing when the Fed cuts rates.” The dollar today fell as low as $1.3367 per euro, a level not seen since March 18, 2005. It will slide to $1.35 per euro and 115 yen this week, Trinh forecast.
The Fed left its overnight lending rate between banks at 5.25% in the past three months, after two years of increases. Futures contracts showed traders see a 100% chance of a cut to 5% in March, after the Institute for Supply Management's factory index shrank for the first time in more than three years. “It is completely justified, based on the manufacturing data we got last week, to expect a Federal Reserve rate cut, possibly in the second quarter of next year,'' said Ben Pedley, an investment strategist in Singapore at LGT Bank, a unit of Liechtenstein's LGT Group. “Against that backdrop, it's hardly surprising that the dollar's declined.” The ECB will raise rates for the sixth time this year to 3.5% on December 7, according to the median estimate of 26 economists in a Bloomberg News survey. Producer prices rose 0.1% in October after falling 0.5% in September, according to the median estimate in a Bloomberg survey. The ISM's non-manufacturing survey, due tomorrow is expected to drop to 55.5 for November from 57.1 the prior month, as construction and manufacturing weakness spreads, according to the median estimate of economists surveyed by Bloomberg.
The European single currency climbed to a record high against the yen last week after reports showed manufacturing expanded for a 17th month and unemployment declined to the lowest in five years. The euro was at 153.93 yen from 153.96 yen on Dec. 1 when it reached an all-time high of 154.11. Japan's currency may drop for a third day against the euro after a government report today showed companies spent less than forecast on business investment in the third quarter. Investment rose 12.0% in the three months ended September 30, the Ministry of Finance said in the report, below the 15.3% median forecast of six economists surveyed by Bloomberg News. “The BOJ is unlikely to lift rates this year and perhaps this fiscal year ending March while the ECB will probably boost them'' in coming months, said Ryohei Muramatsu, a manager of Group Treasury Asia at Commerzbank in Tokyo. “The yen is likely to weaken” today to the record low of 154.11 per euro set last week and to 115.50 against the dollar. The yield premium investors earn on benchmark 10-year German bunds over similar-maturity Japanese bonds was 2.049 percentage points today, above the average of 2.011%age points during the past year. (Bloomberg)