For a few weeks now, we’ve been writing about how long positions on the dollar have broken fresh records each week, as investors continued to ditch the yen, the euro, and commodity currencies for the mighty greenback.
On Monday the greenback surged to a seven-and-a-half-year high against the yen and a two-year high against the euro having received a fresh boost from healthy U.S. jobs figures.
Total long positions held in the dollar remained at a record $49 billion in the week up to Dec. 2, with the dollar held long against every other currency, according to Commodity Futures Trading Commission. The report represents a tiny slice of the overall market, but still a reasonable proxy for the whole.
How many euros $1 buys
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How many yen $1 buys
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So how high can the dollar really go?
Strategists at the largest three banks for forex trading, expect the greenback to extend its rally towards and beyond parity with the euro, which buys about 1.227 dollars today.
Citigroup, the biggest of the big foreign exchange trading banks, is advising clients to position now for another round of dollar strength, proposing going long the dollar via options.
“Euro and yen negatives are well known, dollar positives less so. Fed normalization will be the main dollar driver in 2015,” says Steven Englander, head of G-10 strategy at the bank. Citi thinks the euro will weaken to 1.15 “or a bit lower” against the dollar by the end of 2015, adding — crucially — that it could fall further and faster if the ECB embarks on quantitative easing or if expectations of a rate hike in the U.S. become firmer.
Deutsche Bank, the second largest forex-trading bank, is far more bearish on the euro’s prospects against the surging dollar. It’s going one better than parity, expecing the euro to hit 0.95 to the dollar in 2017, before recovering to 1.15 in 2019. Strategist Alan Ruskin thinks the euro will be trading around 1.15 in a year from now.
“This year the dollar has proved it can still rally when U.S. risk appetite and stocks improve and U.S. yields move lower, not traditionally a dollar positive environment,” Mr. Ruskin said. How far the dollar has come in breaking old correlations, he added, “is one indication of how far it can go when the higher rates story finally kicks into gear.”
Barclays, number three in the market, forecasts the euro to trade 1.07 against the dollar by the end of 2015.
It’s a bull run with deep consequences, as these thoughts by the Bank for International Settlements attest, and emerging markets are already feeling the fallout.
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