ORLANDO, Fla., July 4 (Reuters) - Speculators have cut their
net long dollar position to a two-month low, but this is not
necessarily evidence of a more fundamental souring of sentiment
toward the greenback.
At least not yet.
While the ebbing of U.S. rate hike expectations recently has
eroded the dollar's rate appeal, none of its G4 rivals are
glowing alternatives. The Federal Reserve is still expected to
outgun its peers when it comes to raising interest rates.
Indeed, funds scaling back their bullish bets on the dollar
may be simply taking profit, clearing the decks, and preparing
to build the net long position up again, which would probably
help push the currency to retest June's 20-year high.
U.S. futures market data show that the hedge funds reduced
their net long dollar position against other G10 currencies by
$2 billion to $14 billion in the week to June 28. It was the
first decline in three weeks.
Six weeks ago, funds' net long position nudged $21 billion.
Much of the Commodity Futures Trading Commission's dollar
position shift was in sterling. Funds reduced their net short
sterling position by around 10,000 contracts to 53,000
contracts, the smallest net short position since early April.
It marked the fifth week in a row that funds have scaled
back their bearish bets against the pound, and was the biggest
shift since February.
But sterling is trading heavily and last week dipped back
below $1.20 after data showed that Britain in the first three
months of the year recorded its widest current account deficit
since the 1950s, of more than 8% of GDP.
The pound has fallen 10% against the dollar this year.
That's more than the euro's fall against the dollar, even though
the Bank of England has raised rates by more than 100 basis
points since December.
A long position is effectively a bet that an asset will rise
in value, and a short position is a bet it will fall in value.
EURO PAIN, YEN SHOCK?
The CFTC report also showed that funds retained a net short
euro position for the third week in a row but trimmed it
slightly. Euro positioning is light, and could go either way,
but the pressure appears to be building to the downside.
There's a growing view that the euro zone is hurtling
towards a potentially nasty recession, one that the European
Central Bank will struggle to mitigate because inflation is well
above target. If that wasn't enough, the ECB also needs to rein
in widening sovereign yield spreads.
According to analysts at Bank of America, rate hikes of 50
basis points has become "the norm for many central banks." But
not the ECB.
"The euro is increasingly being left behind in the global
rate hiking cycle. We think that the path of least resistance
remains for a weaker euro through the summer," they wrote on
Meanwhile, CFTC funds reduced their net short yen position
for the seventh consecutive week to the smallest this year at
around 52,000 contracts. Their bearish bet on the Japanese
currency has more than halved in that time, and is now worth
less than $5 billion.
BofA analysts reckon the yen will remain under pressure
because the Bank of Japan is the "last dove standing", as it
maintains its 'yield curve control' policy of buying however
many bonds necessary to cap the 10-year yield at 0.25%.
The yen last week slipped to a fresh 24-year low of 137.00
per dollar, and its upside potential in the near term looks
limited - funds have been reducing their short position for
several weeks, yet the yen has continued to slide.
But Robin Brooks at the Institute for International Finance
warns that yen bears are about to get a "harsh reality check" if
the world slips into recession.
"The Yen always strengthens when adverse shocks hit. We're
about to see a big unwind and reversal of recent Yen
weakness..." Brooks tweeted on Sunday.
(The opinions expressed here are those of the author, a
columnist for Reuters.)
(By Jamie McGeever; Editing by Sam Holmes)