Currency traders are getting no joy from one of the market’s most crowded trades.
US dollar bulls have reason to be gloomy after the greenback ended last week little changed against a basket of peers following a three-week decline. The US currency struggled to lure buyers after a mixed jobs report and a US Federal Reserve meeting in which officials signaled no change to their interest-rate policy outlook.
With centrist French presidential candidate Emmanuel Macron leading in the polls heading into the final round of the election yesterday, market participants have become more optimistic about the euro’s prospects. In the options market, the likelihood of the US dollar rising against the euro this year has tumbled from a month ago.
“The [US} dollar is at a tipping point,” said AG Bisset Associates chief executive officer Ulf Lindahl, who manages about US$1 billion from Norwalk, Connecticut.
The greenback “is likely poised to drop sharply in the months ahead” as US economic data soften, he said.
Inflation and retail sales will be among the indicators to watch this week, as well as speakers including New York Fed President William Dudley.
This month’s consumer-price report might show inflation cooled from the same period last year, echoing last week’s reading on average hourly earnings.
The US dollar fell 0.9 percent last week to US$1.0998 per euro and is down more than 4 percent this year. The likelihood of the greenback posting an annual gain this year has dropped to 17 percent from 32 percent a month ago, options imply.
While the Fed has signaled two more rate hikes this year, traders aren’t convinced the economy is strong enough.
“The [US] dollar has peaked,” Societe Generale global strategist Kit Juckes wrote in a note last week.
While the Fed is on track for a rate increase this month, “that won’t be enough to drive the dollar very far unless the market rethinks the longer-term rate outlook,” he said.
San Francisco Fed President John Williams said his outlook for three or four rate increases this year has not shifted, as the US labor market shows signs of expanding beyond its sustainable rate and the economy is operating above potential.
“I haven’t changed, again, my views on what appropriate policy is” for the remainder of the year, Williams told reporters on Friday after a speech in New York, referring to his comments last month that three or four hikes would be required.
On Saturday, at an event in California, Williams said the economy “is operating above potential.”
Williams, who took over from now-Fed Chair Janet Yellen at the San Francisco Fed in 2011 when she joined the Fed’s Board of Governors, next votes on monetary policy next year.
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