Dollar Falls in Q2 as U.S. Data Raise Doubts on Interest Rates

        By James Ramage
        Investors soured on the dollar over the last three months amid growing doubts about the Federal Reserve's plans for raising interest rates this year. But asset managers expect the U.S. economy's health to improve in the coming months, which would likely spark a resurgence in the greenback, they say.
        A soft spell in the U.S. economy, rising fears of a slowdown in China, and general worries about tepid growth and deflation around the globe all combined to spook the Fed and arrest a dramatic dollar rally that had driven the buck to multiyear highs against rival currencies.
        The dollar began to depreciate broadly as U.S. data showed a contracting economy over the first three months of the year and later a slow economic rebound. In its March policy meeting, the Fed voiced concerns about the global economy and flagged the strong dollar's effects on U.S. exports as a headwind to growth.
        Furthermore, the central bank's downgrades to its growth, inflation and interest-rates forecasts signaled to markets that higher rates were not forthcoming, leading investors to push back their expectations toward the end of 2015 from midyear. Higher borrowing costs would draw yield-hungry investors to the greenback.
        For the three months between April and June, the greenback fell against every developed-market currency except for the yen and the New Zealand dollar. The British pound gained 6% over the period, while the euro rose 3.8%.
        The Wall Street Journal Dollar Index, which compares the buck against a group of 16 widely traded currencies, decreased 1.5% over the period.
        But by May, U.S. economic figures recovered, particularly those for retail sales, wage growth, core inflation and consumer confidence. Investors' rate-rise expectations still tend toward the latter months of the year, but their confidence in the economy's trajectory for the second half of the year has surged.
        "It will be the dollar's time, if we're right about the U.S. economy and the Fed's rate response," said Mark Astley, chief executive of Millennium Global, which manages $14 billion. "Going forward, the U.S. economy will be strong enough, and stronger than the rest of the world, while productivity has improved enough to justify an upward shift in the Fed rate cycle."
        Millennium closed out its successful bets on the dollar against the euro shortly after the common currency started to strengthen in March. But the asset manager still likes the greenback against the Australian dollar, the Swiss franc and the yen.
        The market's reassessment of the Fed's timeline encouraged more speculative investors to trim their wagers on a stronger dollar, data from the Commodity Futures Trading Commission showed. Speculative positions a small portion of the market, but many feel they represent an accurate proxy of overall market sentiment. The amount of investor cash betting on the dollar fell by 33% over the quarter, easing many investors' concerns that the trade had become too crowded and vulnerable to sharp reversals.
        "Given the thinning out of long-dollar positions, investors are going to be more comfortable moving back into the dollar while U.S. data improve and the Fed approaches liftoff," said Mark McCormick, currency strategist at Credit Agricole.
        Fidelity Investments also trimmed its short-euro positions against the dollar during the second quarter, said Curt Hollingsworth, portfolio manager at Fidelity Investments. But the asset manager, which oversees $785 billion in fixed-income investments, is betting the dollar will strengthen against many developed market rivals over the coming year.
        "At some point, maybe in the second half of 2015 or in early 2016, the Fed will raise rates, against the backdrop of central banks in the eurozone and Japan most likely still implementing [large bond-buying programs]," Mr. Hollingsworth said. "The dollar would do better in that scenario."
        (END) Dow Jones Newswires

        June 30, 2015 17:50 ET (21:50 GMT)

#FX
#Forex
#SaleForex
#DollarFalls
#Q2
#US_Data
#RaiseDoubts
#InterestRates