© Reuters. FILE PHOTO: A picture illustration shows U.S. 100 dollar bank notes taken in Tokyo
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By Saqib Iqbal Ahmed and Ritvik Carvalho
NEW YORK/LONDON (Reuters) – A rally in U.S. yields is clouding the outlook for one of the market’s most popular trades: betting against the dollar.
The U.S. currency is up more than 1% from its recent lows, shadowing a move that has taken the benchmark to its highest level since March on expectations that a Democratic-controlled Congress will dish out more stimulus in 2021 as vaccines roll back the coronavirus pandemic.
Most of the factors that dragged the dollar to multi-year lows in 2020 – including expectations that the Federal Reserve will keep rates at rock-bottom levels – remain intact, and many believe the dollar’s nascent rally is unlikely to last.
Still, the prospect that rising yields will continue burnishing the dollar’s attractiveness has given pause to some investors betting on more declines in the greenback.
“For the majority of 2020, we were more negative on the dollar,” said Thanos Bardas, managing director and co-head of global investment-grade fixed income at Neuberger Berman. “From here we are looking for more two-way action.”
The U.S. 10-year note now has a 165 basis point yield advantage over its German counterpart, up from around 100 basis points in July.
(GRAPHIC: Watch the spread – https://fingfx.thomsonreuters.com/gfx/mkt/ygdvzayrqpw/Pasted%20image%201610548116769.png)
Momentum for at least a short-term bounce could come if nervous dollar bears start unwinding short positions built up over the last several months, analysts said: nearly $30 billion was arrayed against the dollar in futures markets alone last week, CFTC data showed, while fund managers in the most recent BofA Research survey named shorting the dollar as the market’s second “most crowded” trade.
“It has become more risky to continue to be dollar bearish,” said John Doyle, vice president of dealing and trading at FX payments firm Tempus Inc. “The long-term weakness in the dollar may be overdone a touch.”
A bout of dollar strength may hurt trades that thrived during last year’s 7% drop in the U.S. currency, including bets on many global currencies and commodities such as gold.
Following a 25% gain in 2020, gold prices have slipped some 2% year-to-date.
The dollar, a popular safe haven, may also be benefiting from heightened uncertainty in Washington, as fears of further political unrest swirl amid reports of protests planned around President-elect Joe Biden’s inauguration on Jan. 20.
“I think that is exaggerating the strength in the dollar,” said Paresh Upadhyaya, director of currency strategy and portfolio manager for Amundi Pioneer Asset Management.
The dollar’s rise has weakened the technical picture for the euro, with the common currency falling below the 10- and 21-day moving averages, which had been acting as support since…
Read More: Dollar bears grow cautious as U.S. yields rise By Reuters