Dollar bulls beat bears in longest futures stretch since ‘99

‘More Comfortable’

China, the largest foreign U.S. creditor, increased its holdings of U.S. government securities in January for the first time in six months, boosting them by 0.7% to $1.16 trillion, Treasury data released March 15 show.

Organization of Petroleum Exporting Country members boosted net purchases of government debt by $43.3 billion, or 20%, in the 12 months ended Jan. 31, compared to a 13% rise for non-OPEC foreign holdings.

“Market players feel more comfortable holding U.S. dollars,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank, with more than $26 trillion in assets.

Traders’ positions reflect the shift. The difference in the number of wagers by all commercial futures traders on a gain in the dollar versus the euro, yen, pound, Swiss franc and the Canadian, Australian and New Zealand dollars -- so-called net longs -- was 143,884 on March 13, according to CFTC data compiled by Bloomberg. Net shorts, or bets the currency will fall, totaled 387,327 a year ago.

Matching 1999

There have been more positive than negative contracts every week since Sept. 20, matching the stretch ending in July 27, 1999, which was seven months after the introduction of the euro. The Dollar Index rose 8.2% that year, 7.6% in 2000 and 6.6% the next year.

Another sign that the dollar is rising in reaction to a strengthening economy is that the typical relationship between the currency and stocks is breaking down.

During September 2008, as Lehman Brothers Holdings Inc. collapsed in the largest U.S. bankruptcy, the Dollar Index gained 6% and the Dow Jones Industrial Average slumped 34% as investors sought the currency to buy safe Treasuries. The next year stocks rallied 19% on optimism about an economic recovery while the currency gauge fell by 4.2% and Treasuries lost 3.72% as measured by Bank of America Merrill Lynch indexes.

The negative relationship between the dollar and stocks, intact since October 2008, is now breaking down, with the 60-day%-change correlation rising to minus 43% last week from as low as minus 85% in December. A reading of minus 100% means that the two assets always move in the opposite direction.

‘Significant Development’

The dollar has gained 1.3% this month and is down 0.5% so far this year, and the Dow Jones Industrial Average rose to 13,289 March 16, the highest level since December 2007, and gained 8.3% in 2012.

“Typically when we see the Dow up, the dollar is down and that hasn’t happened,” said Woolfolk of Bank of New York Mellon. “That is a very significant development that’s happened rarely since the Lehman crisis.”

Stronger economic data this year damped market expectations of further monetary stimulus after the Fed bought $2.3 trillion of Treasuries and mortgage-backed bonds in two rounds of purchases known as quantitative easing from December 2008 to June 2011. During the second program, which started in November 2010, the Dollar Index fell 3.9%.

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