In This Article:
(Repeats column that ran yesterday. No change in text.)
By Jamie McGeever
LONDON, June 26 (Reuters) - Hedge funds are loading up on bullish dollar bets at the fastest pace on record, taking the Fed's recent hawkish signal on interest rates at face value and going long the greenback for the first time in a year.
The flip side of speculators' burst of love for the dollar is their complete capitulation on the euro: they are liquidating long positions in the single currency also at the fastest pace on record.
The wave of dollar buying from the speculative trading community has helped lift it to its highest level in a year against a basket of major currencies. The question now is how much higher hedge funds and others are prepared to take it.
If their thinking is based primarily on pure interest rate and bond yield differentials, the dollar could strengthen further and push the euro below $1.15. The contrast in messages given by the Fed and European Central Bank this month could not have been starker.
The U.S. central bank indicated it would raise rates four times this year instead of the three it had indicated. The ECB signalled negative rates are here to stay for a long time to come.
Mario Draghi's eight-year term as ECB president could end in October next year without his ever presiding over an interest rate rise.
The latest Commodity Futures Trading Commission figures show that speculators and hedge funds swung to a net long dollar position worth $10.4 billion in the week ending June 19 from a 7.1 billion net short position the week before.
Not only was that the first net long position since June last year, the $17.5 billion swing was the largest dollar-positive shift since the CFTC began compiling data on FX futures contract positioning in 1999.
That came almost entirely from dollar bets against G10 currencies, which swung a record $17.7 billion from the previous week in favour of the greenback. Nearly half of that was a $7.7 bln reduction in speculators' net short euro position.
Specs are now net long dollars against all major currencies except the euro, and they slashed their net long euro position by 52,107 contracts to 36,118 contracts in the week to June 19. That's the smallest long position in over a year and the biggest weekly reduction ever.
As recently as April the net long euro position was a record 151,476 contracts. And there's a good chance it's been cut even further, considering the single currency posted its biggest fall in two years after Draghi's press conference on June 21.
To say relative interest rates and bond yields favour the dollar over the euro is an understatement. The five-year U.S.-German yield spread rose to 309 basis points on June 21, the widest since January 1989.