U.S. dollar hits four-month peak on caution spurred by hedge

U.S. one dollar banknotes are seen in this illustration taken (Photo : REUTERS/Dado Ruvic/Illustration)

The dollar climbed to a four-month peak on Monday in choppy trading, with the euro languishing below $1.18 and commodity currencies falling, as the currency drew some safe-haven bids on concerns about the potential fallout of a hedge fund's default on margin calls.

The dollar index, a measure of the greenback's value against six other major currencies, hit as high as 92.964, its strongest level since November. It was last up 0.1% at 92.904.

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The S&P 500 and the Nasdaq index fell after global banks said they faced potential losses from a hedge fund's default, identified as Archegos Capital, which analysts said was tied to big U.S. media and Chinese tech companies. [.N]

"The dollar is rising on safe-haven buying," said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto. "Traders are afraid that a mini-LTCM (Long Term Capital Management) is underway, and are trying to get out from under the falling dominoes."

LTCM was a large U.S. hedge fund that collapsed in 1998 due in part to highly leveraged strategies, forcing a bailout from the U.S. government.

The euro, meanwhile, struggled on Monday as the prospect of tougher coronavirus curbs in France and Germany dimmed the short-term outlook for the European economy.

The single European currency slipped 0.2% to $1.1769, after earlier dropping to $1.1760, its lowest since November. On a monthly basis, it was down 2.5%, its biggest fall since July 2019.

Compounding the euro's woes have been the widening differentials between German and U.S. yields. The spread for 10-year debt widened to 200 basis points from 150 basis points at the start of the year, boosting the dollar amid U.S. outperformance on vaccinations and the overall economy.

Cambridge's Schamotta said there was quarter-end position-squaring on Monday as well, with investors covering previous short positions on the greenback as the U.S. economy improved. The more upbeat view has fueled expectations the Federal Reserve could raise U.S. interest rates earlier than expected.

"The short-dollar consensus that prevailed in January has collapsed, and participants are increasingly awake to the possibility of continued strength in the greenback over the quarter ahead," Schamotta said.

YEN SHORTS GROW

Weekly positioning data showed the broad trend of growing dollar bullishness remained in play. Hedge funds cut their overall short dollar bets to their lowest level since June 2020 while ramping up their bearish bets on the yen.

Short yen positions have grown in recent weeks with hedge funds building their net short bets to 33% of open interest, according to ING data. Falling bond yields and expectations of a global economic rebound have rekindled short bets. The yen was among the worst-performing currencies so far this quarter, down 6% against the dollar.

The dollar was last up 0.1% against the Japanese currency at 109.81 yen.

Virus-driven caution also helped the dollar higher against the Australian and Canadian dollars. The Aussie was last down 0.1% at US$0.7634 on Monday and while the greenback gained 0.2% versus the Canadian dollar to C$1.2594.

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Currency bid prices at 3:07PM (1907 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 92.9050 92.7830 +0.15% 3.250% +92.9640 +92.7160

Euro/Dollar $1.1768 $1.1794 -0.22% -3.68% +$1.1795 +$1.1761

Dollar/Yen 109.8250 109.6800 +0.13% +6.29% +109.8350 +109.3800

Euro/Yen 129.23 129.33 -0.08% +1.82% +129.4200 +128.8500

Dollar/Swiss 0.9391 0.9393 -0.03% +6.14% +0.9404 +0.9373

Sterling/Dollar $1.3762 $1.3799 -0.24% +0.76% +$1.3846 +$1.3755

Dollar/Canadian 1.2595 1.2571 +0.18% -1.11% +1.2627 +1.2578