The US dollar rebounded on Monday but a respite may be shortlived, with bearish bets on the currency rising to the highest level in more than three years as doubts grow over whether the Federal Reserve will raise interest rates again this year.
Wall Street will glean insights into the thinking of Fed policymakers on Wednesday, when the central bank unveils minutes from its July meeting. The Fed has raised its benchmark rate twice this year, but federal funds futures point to an only one-in-three chance of a third 2017 rate increase.
“The weakening of inflation readings over the past few quarters in both the US and Europe has caused the Fed to backpedal on raising rates again this year,” said Dennis DeBusschere, head of portfolio strategy at Evercore ISI.
The dollar has declined 8.7 per cent against six major developed-market currencies since the end of 2016, confounding many foreign exchange strategists and investors who had forecast a dollar rally on the back of a strengthening economy and expectations for higher interest rates.
The economic performance in the US has underwhelmed expectations, as highlighted by a report last week on retail-level inflation. Core consumer prices, a figure that excludes food and energy, increased 1.7 per cent in July from the same month in 2016, with the rate steady for the third month and well below the 2 per cent pace registered in March.
“The inflation report has further solidified market expectations that the Fed is likely to delay raising rates again until next year,” said Lee Hardman, currencies strategist at MUFG, adding that, “damped Fed rate hike expectations should help to keep the US dollar on a soft footing in the near-term.”
Lacklustre data sparked “broad based” selling in the reserve currency last week, according to ANZ strategist Irene Cheung, with investors particularly bearish on the dollar against the euro. Sterling also saw net buying, while funds shaved short positions on the Japanese yen.
The latest positioning data show that investor sentiment remains dreary. Speculative accounts boosted their net short position on the dollar last week by $4.7bn to $7.4bn, according to an analysis by ANZ Research based on data from the US Commodity Futures Trading Commission. That represents the highest short position since May 2014.
The figures reflect a small slice of a huge market, and track activity in futures that allow investors to hedge against shifts in currencies. Still, they are one of few reliable snapshots of the wider market and are often seen as a proxy for the wider investment community.
Closely watched figures due this week on US retail sales and industrial production may provide further direction for forex traders. However, ING strategist Chris Turner said “solid US data are unlikely to send the dollar [materially] higher” against the euro this week.
Gains for the dollar early in the week came as Trump administration officials sought to temper an esclating war of words between the US and North Korea.