By Caitlin Ostroff
Investor confidence that the euro will continue to strengthen against the dollar is waning as Europe combats rising Covid-19 cases.
Net speculative positions by hedge funds that the euro will rise against the dollar are at a two-month low, according to data from the Commodity Futures Trading Commission. In recent weeks, new Covid-19 cases have climbed in Europe, overtaking the U.S. This has led governments to implement stricter containment measures that are likely to weigh on economic activity.
The number of net speculative contracts betting on the euro's rise against the dollar was about 10,300 as of Oct. 13, according to data on Friday from the Commodity Futures Trading Commission. While the consensus is still for the euro to rise, the level of positioning toward that has fallen from August highs of net 37,000 contracts.
Over the summer, investors began betting the euro would strengthen against the dollar after the European Union passed a recovery fund to provide grants and loans to member nations and new Covid-19 cases fell.
But an uptick in cases and new restrictions could heighten investor concerns that the EUR750 billion, equivalent to $878.81 billion, recovery fund won't be enough should the rise in cases curtail the resumption of economic activity. Funds won't be distributed until next year and could be delayed.
Fresh lockdown measures could also cause eurozone gross domestic product to slow. Florian Hense, an economist at Berenberg, revised his fourth-quarter growth forecast to 1% from 2.5% due to the rising level of Covid-19 cases and restrictions.
The U.K. has introduced a three-tiered system of lockdown measures for England and moved London to the second-highest alert tier on Saturday. France has declared a state of emergency and set a nightly curfew for the Paris region and eight other metropolitan areas across the country. Last week, the Czech Republic shut schools, restaurants and bars through early November.
The rise in cases has also weighed on central and eastern European currencies, with the Hungarian forint falling 2.2% against the euro last week, its worst week since June. The Polish zloty declined 1.7% and the Czech koruna fell 0.9%.
"We had this feeling that Europe managed the first coronavirus wave quite well and that led to a rally. To me now, it does appear the market is souring on that view," said Jane Foley, head of foreign-exchange strategy at Rabobank.
As investors have become less assured of the euro's rise, it has stayed between $1.16 and $1.19 in recent weeks, supported by market expectations that the U.S. election is less likely to be contested and will result in a win for Democratic nominee Joe Biden. Investors expect that larger fiscal stimulus under Mr. Biden, and more diplomatic policies with other countries, will decrease uncertainty -- which usually leads to the dollar strengthening -- resulting in a weaker dollar and stronger assets outside the U.S.
On Monday, the ICE U.S. Dollar Index, which measures the greenback against a basket of currencies, fell 0.5%. The yield on 10-year Treasury notes ticked up to 0.779%, from 0.743% Friday.
"That's kept a glass-half-full view of risk assets and that's one of the reasons that eurodollar hasn't fallen more," said Chris Turner, head of foreign-exchange strategy at ING Bank. "It's potentially a positive path for the U.S. and the global economy, and the euro is clinging on to that."
But if rising Covid-19 cases lead to more hospitalizations and stricter measures, the euro could come under further pressure as economic forecasts recede.
"There's all of these issues bubbling under the surface and the euro's beginning to reflect that," Ms. Foley said.
Write to Caitlin Ostroff at caitlin.ostroff@wsj.com
(END) Dow Jones Newswires
10-19-20 0942ET
