The strengthening US dollar is rattling traders in the US$5.1-trillion-a-day currency market who were all but certain a US Federal Reserve interest rate increase was not in the cards.
The greenback climbed versus all its major peers on Friday, paring a weekly loss and invigorating forecasters who predicted the dollar would strengthen by the end of the year.
Hedge funds added to net bullish futures positions by the most since June. Yet DoubleLine Capital LP’s Jeffrey Gundlach said the popular view that Fed tightening causes the US dollar to rally is wrong and the US currency may break to the downside.
“The [US] dollar would rally on the surprise of a rate hike, but the follow-through reaction would be disappointing,” said Alan Ruskin, global cohead of foreign-exchange research in New York at Deutsche Bank AG, the world’s fourth-
biggest currency trader according to Euromoney magazine.
Policymakers “are well capable of signaling that this is still consistent with a very gradual policy tightening cycle,” he said.
The US dollar has weakened this year as the Fed scaled back expectations for rate increases. Central bank wagers were revived on Friday when Boston Fed President Eric Rosengren joined a litany of speakers saying an increase is still on the table. Traders are looking to Fed Governor Lael Brainard’s speech in Chicago tomorrow for more clues.
The Bloomberg Dollar Spot Index, which tracks the currency against a group of major peers, rallied on Friday, paring its weekly loss to 0.3 percent. The US dollar rose 0.7 percent this week against the euro to US$1.1233, while losing 1.2 percent to ¥102.69.
The greenback will strengthen to US$1.09 per euro and ¥104 by the end of the year, according to the median forecasts in a Bloomberg survey of analysts.
In Taipei, the US dollar yesterday rose against the New Taiwan dollar, gaining NT$0.042 to close at NT$31.552 amid rising fears over a US rate hike.
Heavy foreign institutional selling in the local foreign exchange added downward pressure on the NT dollar throughout the session, dealers said.
However, the trading volume was light since Taiwan was the only exchange open yesterday, which was a make-up day ahead of the Mid-Autumn Festival holiday from Thursday to Sunday next week.
Meanwhile, the pound fell 0.3 percent this week to US$1.3259, ending a three-week winning run that resulted in a gain of 2.9 percent. Sterling slid 0.8 percent to £0.8461 per euro, extending its drop versus the single currency after the European Central Bank refrained from extending its monetary stimulus.
Sterling has outperformed all but one its 16 major counterparts in the past month, as reports from services to construction showed the economy was holding up better than some economists predicted, marking a turnaround from when the Brexit vote and the resulting stimulus from the Bank of England (BOE) made it the worst performer.
All of the 45 economists surveyed by Bloomberg predict the BOE would leave rates unchanged at their record-low of 0.25 percent. The same survey also showed that analysts expect to keep the size of its stimulus plan at £435 billion. Inflation likely accelerated to an annual 0.7 percent last month, according to a separate survey of economists.
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