A strong U.S. economy is giving an unexpected boost to the dollar, frustrating bearish investors betting on its decline, Reuters reported.
The dollar is up 2.5% from its recent low against a basket of currencies and stands near its highest level since March.
The nascent rally has defied expectations for the currency to resume a decline from last year’s multi-decade highs: Net futures bets against the dollar stood at $12.34 billion in the week to May 30 after hitting a two-year low earlier in the month, according to data from the Commodity Futures Trading Commission. Fund managers in the latest BofA Global Research survey named shorting the dollar as the market's third "most crowded" trade.
The dollar is "in a very messy transition from bull market to a bear market," said Aaron Hurd, senior portfolio manager, currency, at State Street Global Advisors. "That transition period is going to be fairly frustrating."
Hurd expects the dollar to remain buoyant over the very short term, but decline steadily over the next few years.
Bears argue that the dollar has plenty of room to fall, as the currency remains some 15% above its post-pandemic low and the Federal Reserve is widely expected to soon end the interest rate increases that have helped support the greenback.
But the bears' view has been stymied by a run of strong U.S. data that suggests the economy remains resilient despite the barrage of Fed hikes aimed at slowing growth and containing inflation. Most investors believe the dollar will likely remain elevated until U.S. data turns decidedly weaker, allowing the Fed to cut rates.
The latest evidence of the economy’s strength came Friday, when the U.S. reported greater-than-expected employment gains for May. Other recent data points, including consumer spending and new home sales, have also weighed against the view that the Fed will cut rates anytime soon.
Traders on Friday were betting that the fed funds rate - which currently stands between 5% and 5.25% - would finish 2023 at 4.988%, compared with expectations in early May to end the year at 4.188%. Higher rates tend to boost the dollar’s appeal.
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