Lehman Brothers Holdings Inc, the fifth-largest US securities firm, recommended clients prepare for a resumption of the US dollar's three-year decline.
The US currency, which gained 4.5 percent versus the euro last quarter, will weaken should the Federal Reserve's interest-rate increases slow the US economy, the company said in its weekly currency strategy report. The US dollar has advanced since reaching a record low of US$1.3666 per euro on Dec. 30.
"Trading-wise, we think the dollar range remains intact and that the current mini-rally may still have legs," wrote James McCormick, Lehman's head of foreign-exchange strategy in London. "But our trading bias is to look for places to rebuild shorts in anticipation of a renewed dollar downtrend."
Speculation Fed policy makers may raise their benchmark rate at each of their remaining meetings this year, or shift to lifting the rate by a half-percentage point, helped push the US dollar higher in the past three months against the euro, yen, British pound, and at least 10 other currencies.
McCormick said investors are overestimating how much the Fed will raise its rate. He expects the central bank to lift its target rate to 3.75 percent by year-end, while investors expect the benchmark rate to rise above 4 percent.
Lehman recommended this week to increase bets the US dollar will decline against Asian currencies, by boosting wagers on a drop against Taiwan's currency, a trade it first recommended Jan. 1. The US dollar will decline should China move to a more flexible exchange rate, the firm said. China has pegged its currency at about 8.3 yuan per dollar for a decade.
McCormick said he will consider paring exposure to the yen after Japan's central bank's Tankan report yesterday showed confidence among Japan's large manufacturers fell to the lowest in a year.
"My bias would be to scale back at least a little of the large yen risk," McCormick said yesterday.
Elsewhere, Lehman advised selling the British pound against the yen and Canadian dollar.
"We think the time has come to position for our medium-run bearish view on sterling," McCormick wrote.
"News from the UK has been undeniably weak in the key household and housing sectors," he said.
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