Everyone Loving the Dollar Raises Correction Alarm to Kit Juckes

San Francisco (Jan 6)  The biggest rally in the dollar in more than four years is raising a red flag that the best-performing major currency of 2014 risks reversing course.

“I am alarmed by consensus and positioning, both of which are extreme,” Kit Juckes, a London-based global strategist at Societe Generale SA, wrote in a note today. “A correction seems likely very soon, if it isn’t already starting.”

Hedge funds and other large speculators boosted futures wagers on the greenback’s strength versus eight of its major peers at the end of last month to the most since the week through Dec. 2, when bullish positions reached a record, according to the Washington-based Commodity Futures Trading Commission. The latest bet was as large as the record net-short position, or wager against the dollar, in 2011, which preceded a turn higher by the U.S. currency, Juckes said.

Currency traders are starting to question the extent to which the dollar can strengthen in 2015 after it completed its best year since 1997. Faltering global growth has cast doubt on the timing of U.S. interest-rate increases, which supported the greenback through the second half of last year, even as the Bank of Japan and European Central Bank embrace monetary stimulus.

The difference in the number of positions on gains versus those on declines -- net longs -- rose to 404,766 as of Dec. 30, CFTC data released yesterday showed. It was the most since the 428,558 reached earlier in the month, the record in data going back to 2003. The record net-short position was 405,267 in March 2011.

The Dollar Index, which Intercontinental Exchange uses to track the greenback against the currencies of six major U.S. trade partners, was little changed at 91.318 today after touching 91.775 yesterday, the highest since December 2005. The measure has advanced 16 percent from a low in May, the biggest rally since the period ending June 2010.

The greenback traded at $1.1940 per euro, after the 19-nation currency weakened to $1.1864 yesterday, the lowest since 2006.

Source: Bloomberg