Hedge funds add to bullish dollar wagers as Fed decision nears

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(Bloomberg) -- Currency traders are growing more bullish on the dollar as a consensus builds that the Federal Reserve is approaching liftoff.

The greenback climbed to a seven-month high against the euro after data showed U.S. inflation and factory output increased in October, fueling speculation the U.S. central bank will raise interest rates from near zero as soon as next month. The rally comes as hedge funds and other large speculators boosted wagers on dollar gains versus eight major currencies by a net 198,491 contracts over the past three weeks, the biggest jump since March 2013, according to data through Nov. 10 from the Commodity Futures Trading Commission.

"The environment is more dollar-positive," said Georgette Boele, a currency strategist at ABN Amro Bank NV in Amsterdam. "The momentum was already optimistic and the consumer price index data has not taken that away," said Boele, whose bank expects the dollar to strengthen to $1.05 against the euro by the end of the year from $1.0642 per euro as of 1:11 p.m. in New York.

The dollar rose 0.4 percent in New York after reaching the strongest level since April 16. The U.S. currency climbed 0.2 percent to 123.43 yen, adding to a 0.5 percent advance from Monday. 

Some of the world’s biggest currency traders, including Deutsche Bank AG, Barclays Plc, and JPMorgan Chase & Co., expect the greenback to advance as the Fed tightens monetary policy. The currency has rallied almost 17 percent against the euro in the past year as traders anticipated U.S. borrowing costs would rise in contrast with unprecedented stimulus being carried out by the European Central Bank.

“It looks like a big bet on the Fed finally putting its money where its mouth is,” said Sean Callow, a foreign-exchange strategist at Westpac Banking Corp. in Sydney. “It looks as though the Fed will indeed kick off its tightening cycle in December, providing a stark contrast to other major central banks and thus providing durable support for the dollar.”

Minutes from the Fed’s October policy meeting will be released on Wednesday. In a statement on the day of that meeting, officials dropped a reference to global risks and referred to their next meeting on Dec. 15-16 as they discussed liftoff timing.

Futures show a 66 percent chance the Federal Open Market Committee will announce a rate increase by Dec. 16, up from a 50 percent probability at the end of October. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

ECB Action

The euro dropped versus most of its major peers as ECB Executive Board member Peter Praet said policy makers see a risk that investors and consumers will lose faith in officials’ projections for reviving inflation.

The ECB meets Dec. 3 amid speculation it will increase efforts to bolster inflation and economic growth in the region.

“In euro-dollar, the rather dovish comments from ECB’s Praet are dominating,” said Esther Reichelt, a strategist at Commerzbank AG, said from London. “If the ECB is stressing the de-anchoring of inflation expectations, and the Fed playing them down, then that stresses that we are going to see monetary policies moving in different directions. That justifies, in this case, lower levels in euro-dollar.”

The euro is set to decline by 2 to 3 U.S. cents on Dec. 3 and then another 2 cents should the Fed raise rates on Dec. 16, taking the currency to parity by year-end, Robin Brooks, Goldman Sachs Group Inc.’s New York-based chief currency strategist, wrote in a report Monday.

“Given that the beginning of 2016 is likely to bring renewed vigor to risk-taking, we think it is perfectly possible for EUR/$ to reach 0.95 -– our 12-month forecast -– by end- March,” he wrote. “One of the reasons we expect plenty of Euro downside is that –- in our assessment -– little is priced for Dec. 3.”