Dollar Bears on the Run as Bets Turn Positive for First Time Since Pandemic

By Yasin Ebrahim

The dollar ended flat Friday, but traders are warming up to the idea of that greenback’s run higher is here to stay, as bets on the world’s reserve currency turned positive for the first time since the pandemic began.

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, rose 0.06% to 92.885. Earlier this week, the greenback rose to 93.195, a nearly four-month high.  

The value of the net long dollar position was $399.69 million in the week ended July 20, the first long position since March 2020, compared with a net short of $4.06 billion the previous week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday.

A patient Fed and a further recovery in the global economy – two key ingredients for the bearish thesis on the dollar – have come under pressure in the recently, helping to shift sentiment on the greenback.

“The combination of a less dovish Fed and the Delta Variant has certainly hit portfolio flows to emerging markets, which have been negative in five out of the last six weeks,” ING said in a note earlier this week. “This has certainly provided support to the dollar. It is hard to see this trend turning in the immediate future.”

The Federal Reserve’s two-day meeting is just days away, and could provide further runway for the dollar to advance.

While there aren’t many on Wall Street betting for a surprise change in monetary policy, further clues from the Fed on trimming its bond-purchases is expected to make a positive impact on the dollar.

“Assuming that the Fed continues to dangle the carrot of a September tapering and the global growth environment remains mixed at best, we suspect the dollar can retain its gains, if not edge higher,” ING added.

Further commentary on tapering could also set the stage of the rally in Treasury yields, which have steadied since dropping below 1.14% earlier this week.

“Our strategists think the July FOMC could be an important catalyst for higher yields. An upbeat assessment of the economy from the Fed and continued discussion of tapering could ring hawkish to the market, especially given the benign pace of hikes priced in,” Morgan Stanley (NYSE:MS) said in a note.

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