Dollar weakens as investors exit bullish bets

December 23, 2013 05:19 AM

The dollar dropped (NYBOT:DXH14) versus most of its major peers amid speculation investors were exiting bets on further gains before year-end.

The U.S. currency advanced versus eight Group of 10 currencies last week as the Federal Reserve said it will reduce the size of its bond-purchase program and reiterated that benchmark rates will remain low. Australia’s dollar (CME:A6H14) added to its biggest advance in more than a month. The pound (CME:B6H14) approached a two-year high versus the dollar.

“It would be difficult to say that the dollar is suffering today, it’s just not building on last week’s gain,” Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York, said by phone. “That’s not a reason to be bearish at this point. The tone continues to feel risk-on.”

The dollar was little changed at 104.08 yen as of 10:12 a.m. New York time. It climbed to 104.64 on Dec. 20, the highest since October 2008. The greenback slid 0.2% to $1.3698 per euro. Japan’s currency dropped 0.2% to 142.57 per euro.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major counterparts, slipped 0.2% to 1,019.85, after rising 0.5% last week. The measure is up 3.5% this year.

Budget Accord

A budget deal in Washington and the Fed’s plan to taper its bond buying will allow for a higher growth estimate, International Monetary Fund Managing Director Christine Lagarde said on NBC’s “Meet the Press” yesterday without specifying updated figures. U.S. stocks rose Dec. 20 after a report showed the economy expanded in the third quarter at a faster rate than previously estimated.

Hedge funds and other large speculators increased bets the yen will decline against the U.S. dollar to almost the highest level since 2007, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers on a decline in the yen compared with those on a gain -- so-called net shorts -- was 130,223 on Dec. 17, compared with net shorts of 129,711 a week earlier.

The measure rose to 133,000 in the period ended Dec. 6, the most since 2007, when it climbed to a record 188,000.

‘Underlying Trend’

“While the potential for speculative dollar-yen (FOREX:USDJPY) profit-taking remains substantial given yet another new high, the underlying trend of yen weakness should persist into the New Year,” Adam Myers, European head of currency strategy at Credit Agricole Corporate & Investment Bank in London, wrote in a note to clients. The dollar will rise to 106 yen by the end of the first quarter of 2014, he wrote.

The U.S. currency gained last week as the Fed said Dec. 18 it plans to cut monthly bond purchases in January to $75 billion from $85 billion. It reinforced assurances that it’s a long way from raising borrowing costs, saying the benchmark rate is likely to stay low “well past” the time that unemployment falls below 6.5%, particularly if inflation continues to run below its 2% goal.

The Fed has kept its benchmark rate at zero to 0.25% since 2008.

“The dollar is still basking in the support that tapering should provide through 2014, but there has inevitably been some profit taking among those exchange rates which saw the bigger recent moves,” said Daragh Maher, a currency strategist at HSBC Holdings Plc in London.

Market Measure

The dollar appreciated 3.8% and the euro climbed 8.3% this year, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The yen has weakened 15.1%, the largest decline, followed by the Aussie’s 12.1% drop.

Australia’s dollar may advance toward 89.50 U.S. cents as investors take profit on positions betting on Aussie declines, said Ray Attrill, the global co-head of currency strategy at National Australia Bank Ltd. in Sydney.

The Aussie rose 0.3% to 89.48 U.S. cents after gaining 0.6% on Dec. 20. It reached 88.21 on Dec. 18, the lowest level since August 2010.

The pound gained against the dollar after Bank of England policy maker Andrew Bailey said the central bank may take steps to prevent U.K. house prices from rising too quickly.

Central Bank

The Bank of England is “watching the housing market very carefully,” Bailey said, according to the Telegraph newspaper. The central bank may strengthen tests potential buyers must go through before getting home loans, the Telegraph reported Bailey as saying, citing an interview published on Dec. 21.

The pound climbed 0.2% to $1.6360 after rising to $1.6484 on Dec. 18, the highest since August 2011.

Thailand’s baht declined to the lowest level since 2010 after more than 1,000 anti-government protesters surrounded Prime Minister Yingluck Shinawatra’s home in Bangkok as she criticized the opposition Democrat party’s plan to boycott a Feb. 2 election.

The baht fell 0.2% to 32.680 per dollar after falling to 32.773, the weakest since March 2010.

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