Dollar Bulls Exposed amid Rethink of Timing of US rate rise

The biggest herd of US dollar bulls since February is looking vulnerable as traders slash odds the Federal Reserve will raise interest rates next month.

The dollar fell against the euro for a second day as an emerging-market rout spread to US equities. Minutes from the Fed’s July meeting released Wednesday showed most policy makers didn’t consider conditions for a rate increase to have been met.

“The Fed uncertainty has been heightened – people had September as a date, now it has been moved to December,” said Fabian Eliasson, head of US corporate foreign-exchange sales at Mizuho Financial Group. “I don’t think we have supportive numbers here to say we’re stronger and can withstand the uncertainties in the global economy. The Fed will at least be cautious in their timing.”

The dollar fell against most of its 16 major peers, dropping 0.7 per cent to $US1.1201 per euro as of midday New York time, after a 0.9 per cent slump on Wednesday. It dropped 0.2 per cent to 123.51 yen.

Hedge funds and other large speculators added dollar longs, or bets that the currency will rise, for an eighth week last week, including against the euro and the yen, the longest stretch since 2010. Net long dollar positions rose to 437,635 contracts in the week ended August 11, the highest level since the period ended February 3, according to the latest data from the Commodity Futures Trading Commission.

While a plunge in oil and a slowdown in China have aided the dollar in recent months against currencies of commodity- producing nations, global fragility may eventually spill over into the world’s biggest economy, according to JPMorgan Chase & Co.

“What you have is a dollar that’s really supported by the weakness in non-US economies,” John Normand, the London-based head of foreign exchange and international-rates strategy at JPMorgan, said on Bloomberg Television. “It makes you question how much further this can go. As soon as the US economy weakens in response to a stronger dollar, you’d see the dollar reverse.”

The Fed’s key rate has been in a range of zero to 0.25 per cent since December 2008.

“The minutes showed a new degree of caution, and signalled that the Fed needs more information before it can be confident that inflation will return to target,” Jens Nordvig, a managing director of currency research at Nomura Holdings, wrote in a research note. “We are seeing the dollar retrace in euro- dollar and dollar-yen, and since there is potential for the short end in the US” yield curve “to reprice further, this impulse could extend further from here.”