Investors are increasingly questioning how much further the US currency can strengthen after appreciating almost 10% this year
Bloomberg
New York
Currency traders are gearing up for one of the busiest weeks of the year.
The European Central Bank is forecast to boost monetary stimulus, the Federal Reserve gets its last chance to scrutinise US payroll data before its December 15-16 meeting, and Fed Chair Janet Yellen appears before Congress. Those events may prove crucial for determining the path of the dollar, which is poised for its best month since July.
Investors are increasingly questioning how much further the US currency can strengthen after appreciating almost 10% this year.
The Bloomberg Dollar Spot Index is trading near its highest in data going back to December 2004, while Societe Generale’s Kit Juckes wrote in a client note on Friday that the currency is overvalued by some measures.
At the same time, futures show traders continue to pile on dollar wagers amid speculation that the Fed will raise rates next month.
“It’s all going to come down to next week,” Bipan Rai, director of foreign-exchange strategy at Canadian Imperial Bank of Commerce’s CIBC World Markets unit, said from Toronto. “There’s really a mishmash of event risks to watch for.”
The Bloomberg Dollar Spot Index, which tracks the greenback against 10 peers, added 0.5% this week. The measure is set to rise 2.3% this month.
The US currency rose for a second week versus the euro, adding 0.5% to $1.0593 per euro. The dollar was little changed at ¥122.85.
European policy makers meet December 3 to discuss monetary policy and what the ECB can do to prop up sluggish inflation within the region. The central bank is considering cutting its deposit rate further below zero and adding to its programme of quantitative easing.
That contrasts with the US, where officials are edging closer to a rate increase as early as December.
Yellen is scheduled to address the Economic Club of Washington on December 2 and appear before a congressional committee on December 3, a day before November jobs data are released.
American companies probably added 200,000 jobs this month, according to a survey of analysts compiled by Bloomberg. That would be down from 271,000 positions added in October, the most this year.
“Our expectation is that next week the payrolls report should continue to show that employment growth is still expanding solidly in the US,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ in London.
“The divergence trade has regained momentum and that’s encouraging the rebuilding of long dollar positioning.” A long position is a wager on a currency strengthening.
Hedge funds and other large speculators increased net bets on the dollar to the most in three months in the week through November 17, according to Commodity Futures Trading Commission data. Positions for the week through November 24 will be released on November 30.
Juckes, a SocGen global strategist in London, said he expects dollar buying to continue into the Fed’s meeting, while he sees a big chance of a “significant correction” afterwards.
