World Economy

Currency Trade Stuck in a Fed-Induced Rut

Currency Trade Stuck in a Fed-Induced RutCurrency Trade Stuck in a Fed-Induced Rut

Trading the world’s most widely used currency pair has become a thankless chore for investors.

The dollar has been hovering around its short- and medium-term averages against the euro–near $1.10 per euro–since late June. An economic slowdown in China and a commodity rout have pushed the greenback higher this quarter versus most major peers, Bloomberg reported.

Yet it registered the smallest move in that time against the common currency amid signs of European growth and expectations that the Federal Reserve will take its time in raising US interest rates.

“I don’t think there’s any reason to bother with it, to be honest,” Daniel Brehon, a New York-based strategist at Deutsche Bank AG, said by phone, referring to the euro-dollar trade. “Our view is looking for a hike in September, but we’re all sympathetic with the idea that it’ll be very slow and it’ll be wait-and-see for six months and go again,” he said, speaking about the Fed’s approach to raising rates.

The dollar rose 0.3% to $1.1078 per euro in New York. It was little changed at 124.39 yen. The Bloomberg Dollar Spot Index, which tracks the currency versus 10 major peers, rose 0.2% to 1,210.39.

The euro has been trading along the 50- and 100-day trend lines, which are at $1.1082 and $1.1047, respectively. The density of buy and sell orders at $1.10 is about equal, according to data from Commerzbank AG, leading to a stalemate.

 Dollar Positioning

Trade balance in the euro area, which was in deficit until 2011, rose to a surplus of 21.9 billion euros in June.

“You have a trade balance that’s better in the eurozone, they have a current account surplus that’s continuing to rise, and growth is a little better,” Brehon said.

While hedge funds and large speculators are still betting on a stronger dollar against the single currency, the number of wagers has almost halved from its record in April, according to Commodity Futures Trading Commission data. Net futures positions betting on dollar gains were at 115,210 contracts as of July 20, from as high as 226,560.

That decline coincided with futures traders reducing the probability that the Fed will raise rates in September. Futures show a 48% chance the Fed will raise borrowing costs at its next meeting on Sept. 16-17, based on the assumption that the effective fed funds rate will average 0.37% after the first increase. That’s down from as high as 54% on Aug. 7.