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Investors boost bearish dollar bets after tepid inflation data

Investors increased bets that the US dollar will decline further after its worst seven-month start to a year in three decades with disappointing inflation figures expected to keep a lid on the pace of Federal Reserve rate increases.

Funds boosted their net short position on the greenback by $4.7bn last week to $7.4bn, the biggest net short in more than three years, according to an analysis by ANZ Research based on data from the US Commodity Futures Trading Commission.

The figures, which track trades in derivatives that allow investors to hedge against and speculate on shifts in the currencies market, underscore the dollar’s torrid performance this year. The buck has declined by 8.8 per cent against six major developed-market currencies since the end of 2016, confounding many foreign exchange strategists who forecast a dollar rally on the back of strength in the economy and expectations for higher interest rates.

But the US’s economic performance has underwhelmed expectations – something that was highlighted by a report last week on retail-level inflation. Consumer prices increased at 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.

Lacklustre data sparked “broad based” selling in the buck 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.

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.

Meanwhile, an “easing” this weekend in geopolitical uncertainty sparked by the war of words between the US and North Korea has on Monday pressured the buck against the South Korean won, Mr Turner said.