Dollar bears turn cautious as US yields rise by Reuters

By Saqib Iqbal Ahmed and Ritvik Carvalho NEW YORK / LONDON (Reuters) – A rally in US yields is clouding prospects for one of the most popular trades on the market: betting against the dollar. The U.S. currency is up more than 1% from its recent lows, following a move that has pushed the benchmark index to its highest level since March on expectations that a Democratic-controlled Congress will distribute more stimulus in 2021 through 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 lows, remain intact, and many believe the dollar’s nascent rally is unlikely to last. Still, the prospect that rising yields will continue to polish the dollar’s appeal has made some investors pause to bet on more dollar declines. “For most of 2020, we were more negative against the dollar,” said Thanos Bardas, Managing Director and Co-Head of Investment Grade Global Fixed Income at Neuberger Berman. “From here we are looking for more bidirectional actions.” The US 10-year bond now has a yield advantage of 165 basis points over its German counterpart, up from 100 basis points in July. Momentum for at least a short-term rebound could come if nervous dollar bears begin to undo accumulated short positions in recent months, analysts said: Nearly $ 30 billion was placed against the dollar in futures markets alone. Last week, CFTC data showed, Fund managers in the most recent BofA Research survey named the dollar short sale the second “busiest” trade on the market. “It’s gotten more risky to remain bearish for the dollar,” said John Doyle, vice president of operations and operations at payments firm FX Tempus Inc. “The long-term weakness of the dollar may be overstated.” A bump in the dollar might hurt trades that prospered during last year’s 7% drop in the US currency, including betting on many global currencies and commodities like gold. After a 25% gain in 2020, gold prices have fallen 2% so far this year. The dollar, a popular safe haven, may also benefit from increased uncertainty in Washington, as fears of further political unrest swirl amid reports of planned protests surrounding the inauguration of President-elect Joe Biden on 20 January “I think that’s overstating dollar strength,” said Paresh Upadhyaya, director of foreign exchange strategy and portfolio manager at Amundi Pioneer Asset Management. The rise in the dollar has weakened the technical outlook for the euro, with the common currency falling below the 10- and 21-day moving averages, which had been acting as support since early November. The darkening of economic clouds across Europe amid new lockdown measures to combat a second wave of COVID-19 has also undermined the case for a rising euro. “We are skeptical about a stronger euro, particularly during a eurozone recession that is more severe than in most of the rest of the world,” said Athanasios Vamvakidis, Global Head of Currency Strategy for the G10 at Bank of America Merrill. Lynch (NYSE :). However, some investors believe that an increase in US yields can only go so far. “We’re not going to see US yields rise to a level where they provide more performance-based support for the dollar,” said Jeremy Stretch, head of G10 currency strategy at CIBC.