Currency traders are scaling back their bets against the U.S. dollar on concern over global growth and the spread of the Eurozone contagion.
For the week ended Aug. 9, Commodity Futures Trading Commission data revealed that aggregate bets that the U.S. dollar will depreciate against the euro, yen, pound sterling, franc, Mexican peso, the Australian, Canadian and New Zealand dollars dropped by 154,105 contracts to 153,216, signaling that traders are betting the greenback will begin to strengthen, reports Allison Bennett for Bloomberg.
Hedge funds and other large speculators have lowered their wagers on a weaker dollar from the record high of 405,267 in March. Bets on an appreciating dollar are up while futures traders have cut their bets on further strength in the yen and franc.
“The sell-off in risk assets is due to the repricing of global growth,” remarked Ray Attrill, head of currency strategy at BNP Paribas SA. “The volatility levels have just been off the scale in foreign exchange, and that has deterred people from taking up the Fed’s invitation to use the dollar as a funding vehicle for risk appetite.”
“Our preferred strategy is to keep selling rallies in the euro, sterling, Australian and Canadian dollars against the greenback given our cautious view on the outlook for financial markets,” said Mansoor Mohi-uddin, chief currency strategist at UBS AG Singapore.
The Federal Reserve has promised to keep its target interest rate for overnight loans at record lows until mid-2013.
Yields on the benchmark 10-year Treasury notes hit a record low 2.0346% last Friday.
Street One Financial analysts said they have seen higher activity in options based on PowerShares U.S. Dollar Index Bullish (UUP).
The ETF profits when the dollar strengthens against major rivals.
“The ETF has been trading in a narrow range for the past three sessions, marginally strengthening against other currencies such as the euro and the trend has typically involved out of the money call buyers as well as buyers of call spreads,” Street One said in a note this week. “From a sentiment standpoint, it seems that options investors are favoring a gradual strengthening of the U.S. dollar against other currencies including the Euro. By design, UUP follows a rules based methodology which tracks the performance of the U.S. dollar via long futures, versus the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.”
PowerShares U.S. Dollar Index Bullish
click to enlarge
Max Chen contributed to this article.