Dollar Bulls Retreating From Bets Against Euro

The biggest surge in the value of the U.S. dollar since 2005 appears to be waning, as traders retreat from bets against the euro and other currencies.

Futures traders at the Chicago Mercantile Exchange are in the process of unwinding record bets that the dollar will rally against other currencies.

The number of contracts hedge funds and other large speculators hold betting on a rise in the dollar versus other currencies declined by 70% to 49,335 in the week ended June 22 from a June 8 peak of 163,085, according to an analysis of Commodity Futures Trading Commission data conducted by Bloomberg News.

With concern that Europe's fiscal crisis will cause a nation to default easing, the Dollar Index – which measures the currency against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona – is down 3.5% since June 7.

Money Morning Chief Financial Strategist Keith Fitz-Gerald thinks there may be an opportunity to cash in on the dollar's recent weakness in view of the increasing flows of capital into Asian markets.

"The money has now shifted across the Atlantic, headed through the U.S. economy, and headed straight for Asia. As a result, instead of shorting the euro, I'm now inclined to short the dollar, while being generally long on the Hong Kong dollar, the Australian dollar and even the Chinese yuan," Fitz-Gerald wrote in a recent article.

John Taylor, chairman of FX Concepts LLC, the world's largest hedge fund dedicated to currencies, correctly predicted in March that the dollar would appreciate to $1.20 per euro from about $1.35 at the time.

The euro traded as low as $1.1877 against the greenback on June 7 from $1.4321 at the end of December. Of the most-traded currencies tracked by Bloomberg, the only ones that have risen against the dollar this year are those of Japan, Mexico, Canada and Singapore.

But Taylor now says the greenback may be due for a breather after the index surged 9.57% since January – its best start to a year since 2005. Taylor is one of a growing number of traders who wants to wait and see how the European Union's (EU) nearly $1 trillion bailout plan works out before putting more bets on America's currency.

"We are scary, scary owners of euros," said Taylor, whose firm manages $7.5 billion. "We are keeping our fingers crossed that maybe the euro's appreciation lasts through July and into August. But then the euro is just going to get crushed as it's an impossible situation in Europe."

An agreement by EU leaders to disclose how banks perform on stress tests and a successful bond sale by Spain have eased concerns that European nations will have difficulty raising funds. Spain sold $3.7 billion (3 billion euros) of 10-year debt on June 17 yielding 4.864%, below the 5.04% that the bonds traded at before the sale. Demand for the sale was almost twice the quantity of bonds Spain offered.

The European Central Bank (ECB) on June 10 raised its euro-region growth forecast for this year to 1%, from a previous estimate of 0.8%. Eurozone economies will grow about 1.2% in 2011, the ECB predicted.

But billionaire investor George Soros said European banks weren't "properly cleansed" after the credit crisis because they haven't marked the value of their holdings to market prices.

"Bad assets haven't been marked to market, but are being held to maturity," Soros said in remarks prepared for a speech in Berlin on June 23.

"The collapse of the financial system as we know it is real, and the crisis is far from over," he told a conference in Vienna late last week. "Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt."

In February, Soros called the euro's viability into question, and the currency plunged roughly 17% in the next three months.

JPMorgan Chase & Co. (NYSE: JPM) on June 25 released the results of a second-quarter survey of clients that showed companies in the United States, Europe and Japan expect the euro will remain depressed versus the dollar for the remainder of 2010.

More than 90% of the 141 respondents, which have a total market capitalization of $2 trillion, say the euro will remain below $1.30 for the rest of the year. The average forecast, weighted by the size of the companies, fell to $1.22, from $1.34 in the March survey.

The bank's analysts forecast the dollar will end the year at $1.20 per euro, according to data compiled by Bloomberg.

Both Fitz-Gerald and Soros recommend gold as a favored holding against fluctuating currency markets.

According to his funds' latest filings with the Securities and Exchange Commission (SEC), Soros had about 10% of his assets invested in the SPDR Gold Trust (NYSE: GLD) exchange-traded fund (ETF) as of March 31.

News & Related Story Links:

• Bloomberg:
  Dollar Gains Buckle as Strategists Draw Line at $1.20
• Money Morning:
  George Soros: "We Have Just Entered Act II" of the Global Financial Crisis
• Money Morning:
  Billonaire Investor George Soros Questions the Euro's Future
• Money Morning:
  Is it Time to Bet Against the U.S. Dollar?