Tags: Growth | Fears | Turn | Tide | Against | Greenback

Growth Fears Turn Tide Against Greenback

Monday, 19 Jul 2010 01:56 PM

A six-month rally in the dollar has stalled in recent weeks on concerns about the U.S. economic recovery, prompting some strategists to bet the tide may be turning against the greenback.

An index tracking the dollar against a basket of six major currencies breached key support this week, suggesting more losses could be in store. Activity in the options market and speculative positioning both showed a significant reduction in bullish sentiment toward the dollar.

Selling in the dollar accelerated this week after data showed slowing manufacturing and weakness in consumer spending, while Federal Reserve meeting minutes showed policymakers felt further stimulus may be needed if the recovery slows further.

"The turnaround in attitude toward the dollar has been remarkably swift," said Andrew Wilkinson, senior analyst at Interactive Brokers Group in Greenwich, Connecticut.

"The recent economic vulnerability set in motion by a slew of reports indicating slowdown has coincided with declining vulnerability of European governments and a pick-up in activity in the region," he added.

The U.S. dollar index has lost 4.1 percent this month after rallying about 10 percent from January to June. The index made a decisive close below the key 84 mark on Tuesday.

"(It) was the most dramatic evidence we've seen so far that the dollar could be in for a few months of corrective action instead of just a few weeks," said Walter Zimmermann, chief technical analyst at United-ICAP in Jersey City, N.J.

The euro has rebounded 5.8 percent this month and 9 percent since hitting a four-year low around $1.1875 in early June.

For much of the time since the global crisis took hold in late 2008, the dollar has moved in the opposite direction of equities, rising when stocks fell as investors sought safety in U.S. Treasuries and weakening when stocks rose.

But recent declines in stocks have failed to boost the safe-haven dollar as investors focus on worries about the U.S. economy and the dollar's diminishing yield appeal. The spread between 2-year U.S. and euro zone rates has widened against the dollar in recent weeks.

The 25-day correlation coefficient between the S&P 500 index and the dollar index was last at 0.21, Reuters data showed. In mid-May, the ratio was a strong negative 0.91.

Analysts said risk sentiment will likely continue to drive the dollar's performance, though worsening U.S. fundamentals could mean the dollar would sell off more in a risk-taking environment than it would rally in a risk-off scenario.

"It does not mean risk sentiment does not matter. But these other developments such as growth and interest-rate fundamentals can and should matter a bit more," said Robert Lynch, currency strategist at HSBC in New York.

Samarjit Shankar, managing director for global foreign-exchange strategy at BNY Mellon in Boston, said while fears of a U.S. slowdown have grown, "risk appetite is not dying out completely," as evidenced by steady inflows into emerging market securities and solid bond auctions in Europe.

"There's still a tremendous amount of cash in global portfolios and that cash needs to be deployed into more productive assets," he said.

The value of the dollar's net long position fell to $3.82 billion as of July 6, according to CFTC and Reuters data. In June, net long dollar positions hit above $23 billion.

Jens Nordvig, senior currency strategist at Nomura Securities in New York, said while dollar longs have fallen significantly, "it is still fairly large relative to history, when we have been used to an aggregate U.S. dollar short."

In the options market, risk-reversal structures have "given back their huge bias toward a stronger" U.S. dollar, said Simon Smollett, senior foreign-exchange options strategist at Credit Agricole in London.

Goldman Sachs on Wednesday revised lower its forecasts for the U.S. dollar. It expects the euro/dollar to hit $1.35 in six months and $1.38 in 12 months.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, said some of the pessimism on the U.S. economy might be exaggerated. "Sometimes the price action alone made people more pessimistic," he said.

Chandler said the dollar could fall to $1.31 per euro and 85 yen in the near term. But he added: "This is largely a correction to what we've seen in the past six months. We're in the middle of a larger bull market for the U.S. dollar."

© 2015 Thomson/Reuters. All rights reserved.

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