The dollar has been on an impressive run over the past two years, but that may now be ending. Hedge funds have already started to trim their positions on the greenback, bullish positions having clocked their lowest level in two years last week.
End of Bull Run For Dollar?
Bull positions on the dollar against the other eight major currencies were down to 36,304 contracts as of April 5. In contrast, more than 420,000 bull positions were in play as of July 2014. A Fed trade-weighted index that had gained 19% over the past two years is now down by 5%.
Currency options on the other hand show there is less chances that the dollar to continue gaining ground against the euro. Against the yen, the probability is less than one in 10. The Bloomberg Dollar Spot Index was down by 3.9% last month; further indication large speculators are trimming their dollar wagers.
A change in tone against the dollar comes on growing concerns about the number of rate hikes that could come into play this year. Federal Reserve Chair, Janet Yellen, called for a cautious approach on rate hikes and this has continued to spook currency investors.
Rate Hike Concerns Impact
Even on a normal hiking cycle head of foreign exchange strategy at UniCredit, Vasileios Gkionakis believes it is highly unlikely the dollar will sustain the past year’s gains. Traders are increasingly becoming skeptical of the Fed hiking rates, a sentiment that continues to hurt dollar strength
Steven Englander, head of Group 10 currency strategy at Citigroup Inc. (NYSE:C) believes the Fed will remain contended with any weakness the dollar encounters going forward.
“The Fed has already indicated its reluctance to hike and is very unlikely to hike to defend the currency. If anything, they seem to be cheering any weakness the U.S. dollar encounters,” said Mr. Englander.
Continued dollar weakness to some extent is good news for US companies, most of them having seen their profits eroded over the past two years.
With US interest rate hike expectations remaining low, A.G Bisset Associate’s CEO of currency, Ulf Lindahl, expects the dollar to continue losing ground. The 35-year market veteran believes the dollar could plunge 30% over the next three years.