Dollar Rebound Set to Extend Amid Fed Speakers, China Tensions

(Bloomberg) — Three straight days of gains are giving hope to embattled dollar bulls who are looking to a slew of Federal Reserve speakers and rising US-China tensions to extend a nascent rebound.

Most Read from Bloomberg

The Bloomberg Dollar Spot Index rose 0.2% on Monday, putting the greenback on track for a gain of nearly 2% over the three sessions through Monday. Most of the greenback’s advance came Friday after a red-hot jobs report fueled bets of more Fed rate hikes to combat surging inflation.

“There are many Fed speakers this week and they are likely to highlight the ‘higher for longer’ theme,” Win Thin, global head of currency strategy at Brown Brothers Harriman & Co., wrote in a note. “Taken in conjunction with dovish hikes last week from the European Central Bank and Bank of England, we believe the dollar rebound will continue this week.”

The dollar’s U-turn comes after it slumped to the lowest since April on expectations the Fed could soon rein in the pace of tightening. Bullish bets on the dollar gathered momentum Friday after the jobless rate in the US hit a 53-year low, spurring expectations that policy makers would have little choice but to keep interest-rates elevated to combat inflation.

Deepening US-China tensions fueled by an alleged Chinese spy balloon and yen weakness amid speculation on the appointment of Masayoshi Amamiya as a next Bank of Japan governor are adding to tailwinds for the dollar. A bevy of Fed members are scheduled to speak this week, with Chair Jerome Powell due to talk in Washington on Wednesday.

The greenback has further to gain as bearish currency positions look “stretched,” said Fiona Lim, a foreign-exchange strategist at Malayan Banking Berhard in Singapore. The “potential for further US-China conflict adds to reasons for the dollar to extend its bullish rebound,” she said.

Story continues

Dollar Bears

Still, many investors reckon that the dollar’s strength is likely to be short-lived.

Hedge funds have clung to bearish greenback bets for seven straight weeks, according to Commodity Futures Trading Commission data compiled by Bloomberg ending Jan. 27. Amundi SA said a potential slowing in Fed rate hikes this year and resilient economic growth outside the US makes the fund less bullish on the greenback, while Citigroup Inc. said the “path of least resistance” for the dollar is to weaken in the short-term.

Selling pressure on the US currency may have exhausted for now, and investors could see a resurgent greenback in the first part of February, Marc Chandler, chief market strategist at Bannockburn Global wrote in a note. “We see this as a counter-trend move and expect dollar weakness to re-emerge.”

Most Read from Bloomberg Businessweek

©2023 Bloomberg L.P.