WSJ: Dollar Hits Long-Term Highs Against Yen, Euro
A two-month rally in the U.S. dollar accelerated Tuesday, driven by expectations that monetary policy in the U.S. is set to follow a different path than that of other major economies over the coming months.
The dollar climbed against key currencies, with the euro dropping to its lowest point in a year, the yen edging closer to its weakest level of 2014, and sterling lurching lower.
The dollar has advanced in recent months as a raft of improving U.S. economic data rolled in, from improving consumer confidence to better labor market conditions. U.S. Federal Reserve officials signaled late last month that they were on track to end their extraordinary monetary stimulus, dubbed quantitative easing, in October—a step seen as a precursor to raising benchmark rates.
By contrast, investors say the European Central Bank, which meets Thursday, may further cut interest rates or undertake additional stimulus measures, including an asset-backed securities-purchase program, to prop up a sputtering economy and drab inflation. On Monday, data showed manufacturing activity in the eurozone in August slid to its lowest point in almost a year.
"The market is coming to the view that the U.S. dollar will be stronger," said Khoon Goh, a currency strategist at ANZ in Singapore. There's a "divergence in the outlook for monetary policy and that is supportive of the U.S. dollar and bearish for the euro."
He forecast the euro to keep falling and the U.S. dollar to rise based on his expectation that the Federal Reserve will raise rates sooner than many believe. Higher interest rates will likely boost Treasury yields and increase the allure of dollar-denominated bonds.
He's not alone. Bets that the dollar will climb against the euro, yen and pound increased for the sixth consecutive week—to a net $23.4 billion on futures contracts—during the week ending Aug. 26, according to the Commodity Futures Trading Commission. Bets against the euro increased by $1.7 billion to a net $21.6 billion, the highest since June 2012. Those figures represent a small slice of a vast market, but are still considered to be a good proxy for trading by funds as a whole.
If the ECB continues or advances its easy-money policies when it meets in Frankfurt on Thursday, the euro's downward trend will continue, said James Brodie, chief investment officer of Sherpa Funds, a currency fund in Singapore.
"The long-term trend [for the euro] is lower," he said.
Still, Mr. Brodie said he recently cut his bets against the euro versus the dollar because it has become a crowded trade.
Bigger-picture macroeconomic fundamentals are starting to drive the currency markets, said Christopher Brandon, founding partner of Rhicon Currency Management in Singapore.
"We may start seeing more sensitivity to big economic releases," he said. "This should all create more volatility as we break out of the unbelievable complacency that has played markets for the last year."
Mr. Brandon said he recently started buying dollar positions against the yen and is short the euro.
He said he will also watch to see whether the U.S. dollar's strength against the euro and yen translate into strength against the Australian dollar, the pound and other major currencies, which could become a broader market theme for the last quarter of 2014.
