By Saqib Iqbal Ahmed and Laura Matthews
NEW YORK (Reuters) – The dollar’s rally over the past month is unlikely to last as it was largely due to a repositioning by temporary factors, including the disruption of U.S. economic data due to the U.S. government shutdown and turmoil in the governments of rival currencies.
The dollar has risen about 3% against a basket of currencies since mid-September, recovering from more than three-year lows after falling nearly 11% earlier this year.
Speculators’ net short bets on the dollar fell to $9.86 billion from a two-year high of $20.96 billion during that period, CFTC data showed before the U.S. government shutdown halted issuance.
Options markets are also showing a shift in sentiment in favor of the dollar, with one- and three-month EUR/USD risk reversals recently reaching their most bearish levels for the euro since mid-June.
Still, analysts are generally skeptical about the dollar’s recovery.
“On a three- to six-month outlook, I think the dollar is going to fall because I think the U.S. economy is going to weaken and interest rates are going to go down,” said Marc Chandler, chief market strategist at Bannockburn Capital Markets.
Much of the dollar’s recent rally can be attributed to investors hedging bearish bets on the currency.
“What’s happening in the markets is basically a positioning adjustment,” said Jayati Bharadwaj, global currency strategist at TD Securities.
In fact, some analysts said the dollar’s rally could be losing steam.
“We’ve definitely seen a very nice period of dollar strength,” said Joel Kruger, market strategist at London-based LMAX Group, which operates multiple global institutional currency exchanges.
Kruger sees risks of further dollar weakness in the near term.
INTERNATIONAL EVENTS BOOST THE DOLLAR
The dollar sold off in the first half of the year on worries about fading American exceptionalism, worries about a hit to economic growth from President Donald Trump’s protectionist trade stance and the specter of a growing U.S. budget and international trade deficits.
But given the halt in American economic releases and political crises outside the United States (in Japan and France), investor attention has shifted away from the dollar’s travails.
The euro snapped a two-month winning streak and was down about 1.3% in October, while the yen has fallen almost 3% against the surging dollar.
Chaos and uncertainty in France, the euro zone’s second-largest economy, has caused the euro to weaken against the dollar, while political changes in Japan have weighed on investor expectations of the Bank of Japan’s monetary and fiscal policy, piling pressure on the yen.