Dollar plays catch-up after stock market surge

[January 26, 2017]  By Patrick Graham

LONDON (Reuters) - The dollar recovered from its worst run since August on Thursday, rising 1 percent against the yen and around half a percent against the euro and pound as investors refocused on the chances of higher U.S. inflation and growth.

While equities and Treasury yields have continued to rise in the past week, fueled by U.S. President Donald Trump's signals of new public spending, the effect on the dollar has been offset by concerns about other sections of his policy mix.

Some downbeat signals out of Japan and another burst higher in U.S. government bond yields were enough to draw more buyers back into the greenback as U.S. traders arrived at their desks on Thursday.

"Obviously there has been this oscillation between euphoria over the macro data and trade protectionism fears," said Kamal Sharma, a strategist with Bank of America Merrill Lynch in London.

"But we have argued this week could be the moment to start reinstating some long dollar positioning, particularly against the yen. There may be a catch-up in the yields in these moves (this morning); Treasury yields have risen quite sharply."

Currency market players have offered a variety of explanations for the dollar's weakness, from concerns about Trump's protectionist bent to his warning over the currency's strength and worries about his approach to geopolitical and social issues.

Either way, the squeeze on the huge bets on the dollar built up at the end of last year has taken many by surprise.

"Positioning does seem to have overtaken the dollar bull arguments and there is an issue of credibility with Trump," said Richard Benson, co-head of portfolio investment at currency fund Millennium Global in London.

"It really has just been a position annihilation."

Speculators have gradually cut their net bets on a stronger dollar from $25.43 billion in the week ending Jan. 3 to $24.44 billion in the week to Jan. 17, data from the Commodity Futures Trading Commission and calculations by Reuters show.

An employee of a bank counts US dollar notes at a branch in Hanoi, Vietnam May 16, 2016. REUTERS/Kham

Data from the sector's biggest banking player Citi suggested that squeeze was already deeper last week, driven by selling by leveraged speculative investors.

The dollar index gained around 0.4 percent on the day on Thursday, having hit a seven-week low of 99.793 in Asian trading. It rose 0.5 percent to as high as $1.0688 against the euro and 1 percent to 114.48 yen.

PRO-BUSINESS

If protectionism is the issue with Trump, it has not shown up in the currencies of some of the Asian exporting economies that, theoretically, should be most exposed.

The Singapore dollar dipped with the yen on Thursday but is trading around its highest since mid-November. The Korean won hit its highest since Nov. 10 in Asian trading. Mexico's peso  strengthened to a three-week high of 20.9300 pesos on Wednesday.

Among the group of G10 developed world currencies, the biggest gainer of the past fortnight has been sterling, up almost 6 percent from troughs hit on Jan. 16. It trimmed those gains after another solid reading of fourth quarter growth to stand half a percent lower on the day at $1.2570.

"It's been clear for some time that the UK economy maintained exceptionally strong momentum in the second half of 2016 ... The question is, what happens next?" said Ranko Berich, an analyst at corporate broker Monex Europe.

"The latest retail sales data shows a slowdown in spending, and inflation is only just beginning to bite. This all adds up to a potential slowdown in the economy this year."

(Editing by Mark Heinrich)

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