FALL IN SHORT POSITIONS BODES WELL FOR DOLLAR / THE FINANCIAL TIMES ( VERY HIGHLY RECOMMENDED READING )

Fall in short positions bodes well for dollar

By Peter Garnham

Published: December 14 2009 13:22

Investors have cut their bets against the dollar drastically amid growing speculation that the currency’s downward trend might have run its course.

Figures from the Chicago Mercantile Exchange, often used as a proxy of hedge fund activity, showed investors cut their net short positions in the dollar from 172,367 contracts on December 1 to 107,284 contracts on December 8.

The fall in bets against the dollar, which had a notional value of $9.8bn, was by far the biggest weekly positioning shift of 2009, and the largest since July 2008.

The reason for the drop was the US employment report on December 4, which revealed much better than expected figures.

This sparked speculation that the Federal Reserve would end its ultra-loose monetary stance sooner than expected, and sent the dollar index, which tracks its progress against a basket of six leading currencies, up 2.1 per cent between December 4 and December 8.

The positioning shift was the result of a massive reduction in long positions in the yen, Swiss franc and euro against the dollar.

Indeed, net speculative positions in the euro against the dollar turned negative for the first time in eight months.

The reversal came as the euro slipped from above $1.50 to just above $1.47 against the dollar. It also occurred amid increasing concern about the fiscal situations of certain eurozone members, including Greece, Portugal and Spain.

Since December 8, the dollar has continued to climb against the euro, hitting a two-month high against the single currency last Friday, as US retail sales came in stronger than expected and fears continued to escalate over the health of government finances on the periphery of the eurozone.

Hans Redeker at BNP Paribas said the conclusion he drew from recent developments was not if to buy the dollar but when to move into long dollar positions.

He said the Fed’s approach of quantitative easing had helped broad areas of the US economy, while the European Central Bank’s liquidity provisions were only aimed at smoothing stresses in the money market.

This, he said, should allow the Fed to start raising interest rates sooner than the ECB as growth in the US outstripped that in Europe.

“We still have our reservations about selling the euro ahead of the year-end as we expect coupon, dividend and profit repatriation to work in favour of the single currency against the dollar,” said Mr Redeker.

“But, once the year-end has passed, the euro is set to collapse against the dollar.”

Copyright The Financial Times Limited 2009.