Dollar Bulls Gain Control as Futures Signal Euro Close to Peak




By Liz Capo McCormick






May 12 (Bloomberg) -- For the first time since December
2005, futures traders are turning bullish on the dollar.


The difference in the number of wagers by hedge funds and
other large speculators on a gain in the greenback versus the
euro, known as net longs, was 21,315 on April 29, figures from
the Commodity Futures Trading Commission in Washington show.
There were net-short positions in each of the previous 123
weeks. At the same time, traders have stepped up their purchases
of options that profit from the dollar's appreciation.


The measures are making long-suffering proponents of the
dollar optimistic that this time the currency's rally may hold,
especially if the Federal Reserve's Open Market Committee
refrains from additional interest-rate cuts. The Dollar Index
traded on ICE Futures in New York, which tracks the currency
against six trading partners, is up 3.3 percent from an all-time
low of 70.698 set on March 17.


``There is kind of a sea change taking place at the
moment,'' said Mitul Kotecha, head of foreign-exchange research
in London at investment bank Calyon, whose forecasts on the
euro-dollar exchange rate in the first quarter were more
accurate than those of the two biggest currency traders. ``It's
probably the early sign of perhaps a more sustained
turnaround.''


The dollar has appreciated 3.4 percent to $1.5482 since
dropping to $1.6019 per euro on April 22, the lowest since the
European currency's debut in 1999. By the end of the year, the
dollar will strengthen to $1.50, according to the median
estimate of 40 strategists surveyed by Bloomberg.


Gaining Traction


The dollar's rebound gained traction last month after the
Open Market Committee said ``substantial'' rate cuts since
September would help foster growth. U.S. employers also
eliminated fewer jobs in April than forecast by economists.


Meanwhile, a slide in business confidence in Germany and
France, which account for about half the euro-region economy,
renewed speculation the European Central Bank will reduce rates
this year. An end to lower rates in the U.S. and the possibility
of cuts in Europe raises the appeal of dollar-denominated
assets.


``The recent shift to a neutral FOMC stance and from a very
hawkish European Central Bank stance, together with U.S. data
pointing to a stagnation rather than a deep contraction, have
already contributed to the dollar's rally,'' said Marc Chandler,
global head of currency strategy in New York at Brown Brothers
Harriman Inc. Chandler said he expects the dollar to reach $1.44
per euro by year-end.


Rate Futures


Interest-rate futures on the Chicago Board of Trade show an
82 percent chance the Fed will keep its target unchanged at 2
percent when policy makers next meet on June 25, with the
balance of the odds calling for a quarter-percentage point cut.


The ECB will lower its 4 percent main refinancing rate to
3.75 percent by the end of September and 3.50 percent by year-
end, according to the median estimate of 31 economists surveyed
by Bloomberg.


As declining home sales and mortgage losses curbed economic
growth, investor sentiment grew so negative on the dollar that
even longtime pessimists such as Jim Rogers, chairman of Rogers
Holdings, say the U.S. currency is due to rebound.


``I expect a nice rally in the American dollar because so
many have been bearish on the American dollar, including me,''
he said on May 8 in Singapore. Rogers, who co-founded the
Quantum fund with George Soros in the 1970s and correctly
predicted the start of the commodities boom in 1999, cited the
benefit of surging prices for U.S. agricultural products.


Contrarian Indicator


Futures can be viewed as a contrarian indicator because
traders often rush to reduce positions when momentum in a
currency shifts. The last time net longs were this high, in
December 2005, the dollar was nearing the end of a one-year, 13
percent rally versus the euro. It weakened 11 percent in 2006
and depreciated by the same amount in 2007.


``It is more likely than not that reasons for speculators
returning to selling the dollar will be greater than reasons for
them to sell the euro,'' said Derek Halpenny, head of global-
currency research in London at Bank of Tokyo-Mitsubishi UFJ
Ltd., who expects the euro to reach a record high within three
months. ``I see risk that the ECB doesn't do anything this year
and expect the Fed will ease again in 2008.''


Between May 2005 and the end of that year, futures traders
were net long the dollar versus the euro 73 percent of the time.
The U.S. currency gained 7.9 percent in that period.


Call Options


Net-short positions versus all currencies fell to $10
billion in the week ended April 29, from $22 billion in the
prior period, according to CFTC data tracked by Morgan Stanley.
Speculators had net-long bets on the dollar versus the pound and
the euro. Hedge funds and other large speculators were net-short
the euro for a second week in the period ended May 6.


In another bullish signal for the dollar, demand for one-
month options that grant the right to sell the euro is greater
than for those allowing for purchases. The so-called risk-
reversal rate had a 0.44 percentage point premium for euro puts
relative to calls on May 9.


As recently as March, demannd for call options was greater
than put options. On Jan. 28, the premium for euro calls reached
0.45 percentage point, the highest since April 2007.


``We may very well have seen the bottom in the dollar,''
said Stephen Jen, the global head of currency research at Morgan
Stanley in London, who forecasts the dollar will rise to $1.40
per euro by year-end. ``The dollar has regained some traction
lately. Against the euro, the U.S. dollar is around 25 percent
undervalued.''



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