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Federal Reserve’s tilt towards tighter policy unleashes dollar bulls

Investors have been warming to the greenback since the Federal Reserve indicated last month that interest rates could rise earlier than previously thought. Now, there are signs that dollar bears are throwing in the towel as the US currency builds on its gains.

Bullish wagers on the dollar have jumped sharply this month, according to data from the Commodity Futures Trading Commission tracking the futures market. The net long position of speculative investors on the dollar index — which tracks the US currency against a basket of rivals — has reached its highest level in more than a year at 11,257 contracts. A net long position marks the difference between positive and negative bets.

CFTC figures also show speculators — groups such as hedge funds that bet on currencies — are growing more positive on the dollar’s prospects against the euro, the British pound and the yen.

While futures make up only a small part of the $6.6tn-a-day foreign exchange market, they provide an important and timely proxy of investor sentiment.

“The market has been catching up with the hawkish shift from the Fed that we saw in June,” said Jane Foley, head of FX strategy at Rabobank.

Fed chief Jay Powell has tried to strike a balance between stressing that the central bank will act to tame the threat of runaway inflation, while at the same time sticking to its interpretation that the bulk of the current burst of price rises is down to transitory factors.

His comments last week to US lawmakers that the Fed is “still a ways off” from reducing its monetary support for the economy only briefly dented the dollar’s recent progress.

The dollar index ended the week at 92.71, close to its highest level since the start of April. The euro traded close to a three-month low against the dollar of $1.18, down roughly 4 per cent from its peak in May.

Foley said investors betting on a renewed decline may have been disappointed and “capitulated” on their bearish bets.

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