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Analysis: Dollar's detractors may be missing its comeback
Reuters
12:12 p.m. CST, January 20, 2012
NEW YORK (Reuters) - The dollar's many detractors may have missed it, but the much-maligned U.S. currency is on rise.
The greenback, thought to be on life support and mostly surviving on safe-haven flows, hit bottom three years ago and is now in a long-term recovery.
The dollar has been climbing since it struck record lows against the euro in July 2008, helped recently by the euro zone debt crisis, an improving U.S. economy and a return to the dollar as the reserve currency of choice.
The U.S. economic recovery alone is expected to push capital flows into the dollar. If growth does take root more firmly, it will reduce bets on more monetary easing, which has been a debilitating weakness for the dollar since the 2008 financial crisis.
The market is starting to agree in a way that it hasn't in nearly a decade. A key factor that points to more dollar strength can be found in the options market, where bets on the dollar's path against the yen is closer to favoring the dollar more than at any time in at least nine years.
"The deck is stacked, at least at the present, in our favor," said Jacob Gold, president of Scottsdale, Arizona-based Jacob Gold & Associates Inc., an investment strategy advisory firm for high net-worth individuals and companies.
Though up 13.6 percent from the trough in 2008, the ICE Futures U.S. dollar index is currently closer to that bottom than its peak, suggesting more room for improvement. It was last trading at 80.305 .
With the euro, which comprises 57.6 percent of the index, expected to fall to $1.20 in the next several months, according to Barclays, GAM and other firms, from the $1.2915 it trades at today, the index is bound to move higher. The euro has lost 19.5 percent since its last peak in 2008.
The six-member dollar index, composed of the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, troughed at 70.698 on March 17, 2008 as the euro was testing its peak.
"When you compare our country's value, relative to others, we are overwhelmingly better positioned economically than others," Gold said.
NINE LONG YEARS
Dollar investors received a significantly bullish signal in the options market in recent weeks.
Dollar/yen three-month risk reversals traded close to neutral after nine years of being biased to dollar puts, or the right to sell dollars, and yen calls, the right to buy yen.
The dollar/yen three-month risk reversal was last at -0.325 on trading platform GFI after moving steadily down from a trough of -2.63 in July last year.. It has been biased in favor of the yen since at least the third quarter of 2003, using DailyFX data.
"A lot of people are positioning for either dollar/yen stabilization or a fairly big bounce in the dollar/yen," said David Rodriguez, quantitative strategist at DailyFX in New York.
The options play may be a specific sign few want to bet against the very deep pockets of the Bank of Japan, which is determined to keep the yen from rising.
RESERVES
International foreign currency reserves data also points to better days for the dollar despite rhetoric in recent years about finding alternatives to the greenback.
The International Monetary Fund's Currency Composition of Official Foreign Exchange Reserves data shows the dollar's share of known global currency reserves rose 1.9 percent in the third quarter over the second quarter to 61.7 percent, while the euro's holdings were down 0.9 percent to 25.7 percent from a year earlier.
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Reuters
12:12 p.m. CST, January 20, 2012
NEW YORK (Reuters) - The dollar's many detractors may have missed it, but the much-maligned U.S. currency is on rise.
The greenback, thought to be on life support and mostly surviving on safe-haven flows, hit bottom three years ago and is now in a long-term recovery.
The dollar has been climbing since it struck record lows against the euro in July 2008, helped recently by the euro zone debt crisis, an improving U.S. economy and a return to the dollar as the reserve currency of choice.
The U.S. economic recovery alone is expected to push capital flows into the dollar. If growth does take root more firmly, it will reduce bets on more monetary easing, which has been a debilitating weakness for the dollar since the 2008 financial crisis.
The market is starting to agree in a way that it hasn't in nearly a decade. A key factor that points to more dollar strength can be found in the options market, where bets on the dollar's path against the yen is closer to favoring the dollar more than at any time in at least nine years.
"The deck is stacked, at least at the present, in our favor," said Jacob Gold, president of Scottsdale, Arizona-based Jacob Gold & Associates Inc., an investment strategy advisory firm for high net-worth individuals and companies.
Though up 13.6 percent from the trough in 2008, the ICE Futures U.S. dollar index is currently closer to that bottom than its peak, suggesting more room for improvement. It was last trading at 80.305 .
With the euro, which comprises 57.6 percent of the index, expected to fall to $1.20 in the next several months, according to Barclays, GAM and other firms, from the $1.2915 it trades at today, the index is bound to move higher. The euro has lost 19.5 percent since its last peak in 2008.
The six-member dollar index, composed of the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, troughed at 70.698 on March 17, 2008 as the euro was testing its peak.
"When you compare our country's value, relative to others, we are overwhelmingly better positioned economically than others," Gold said.
NINE LONG YEARS
Dollar investors received a significantly bullish signal in the options market in recent weeks.
Dollar/yen three-month risk reversals traded close to neutral after nine years of being biased to dollar puts, or the right to sell dollars, and yen calls, the right to buy yen.
The dollar/yen three-month risk reversal was last at -0.325 on trading platform GFI after moving steadily down from a trough of -2.63 in July last year.. It has been biased in favor of the yen since at least the third quarter of 2003, using DailyFX data.
"A lot of people are positioning for either dollar/yen stabilization or a fairly big bounce in the dollar/yen," said David Rodriguez, quantitative strategist at DailyFX in New York.
The options play may be a specific sign few want to bet against the very deep pockets of the Bank of Japan, which is determined to keep the yen from rising.
RESERVES
International foreign currency reserves data also points to better days for the dollar despite rhetoric in recent years about finding alternatives to the greenback.
The International Monetary Fund's Currency Composition of Official Foreign Exchange Reserves data shows the dollar's share of known global currency reserves rose 1.9 percent in the third quarter over the second quarter to 61.7 percent, while the euro's holdings were down 0.9 percent to 25.7 percent from a year earlier.
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