VOLATILITY TESTS THE NERVE OF DOLLAR BULLS / THE FINANCIAL TIMES COMMENT & ANLYSIS

October 23, 2014 10:19 am

 

Volatility tests the nerve of dollar bulls

 

Alice Ross and Vivianne Rodrigues

 

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Dollar bulls have hit a rocky patch. Buying the US currency has been the favoured trade of currency investors since last year’s “taper tantrum”, when the Federal Reserve said it would ease its bond-buying scheme as the economy showed signs of improvement.

Now, investors are arguing that last week’s “flash crash” in US bond yields was a wake-up call that volatility will make buying the dollar a trickier trade in the weeks and months to come.

“I expect volatility to rise and sentiment to continue to ebb and flow but ultimately still expect the dollar to strengthen, albeit with a lot of disappointment along the way,” says Matthew Cobon, a currency investor at Threadneedle.

The dollar index rose more than 7 per cent in the three months to the start of October to hit its highest level in more than four years, buoyed by expectations the US would tighten interest rates sooner than other major economies. The contrast with the eurozone has been particularly stark, with the European Central Bank instead stressing a shift towards asset purchases to stave off the threat of deflation.

 

Yet the dollar has hit a rocky patch. Concerns from Fed officials that the US currency was too strong at the start of October had already seen the dollar index fall 2 per cent from its peak this month. Last week’s flash crash in US bond yields, which investors say was probably driven by jitters over the health of the eurozone and gloomy prospects for global growth, as well as overcrowded trades, meant it lost more ground.

Yet investors say the bullish case for the US currency is still hard to ignore. Analysts argue that even if the Fed raises rates later than previously expected and the domestic economy is dented by lower global growth, the economic divergence between the US and many other major economies will still hold.

 

“The good thing is it doesn’t take much tightening for the dollar to stand out versus zero rates as far as the eye can see,” says Alan Ruskin, a strategist at Deutsche Bank.


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