Dollar’s best week since April shows it’s still haven

Bloomberg

A nascent revival in the dollar, after a summer of predictions about its demise, is highlighting why it’s still the ultimate haven currency for some investors.

After abandoning the greenback due to the Federal Reserve’s accommodative policy, traders are piling back in, leading to a squeeze of short positions. Liquidity, yield advantage and a lack of alternatives have helped to rekindle interest just as the U.S. starts to get a handle on the coronavirus pandemic in some places.

The Bloomberg Dollar Spot Index is poised to climb about 2.2% this week, the biggest five-day advance since April. Technicals suggest more gains are in the pipeline. The gauge had dropped more than 10% from its March highs to this year’s low in September, as hedge funds increasingly turned bearish on the dollar.

“The dollar is the safe haven of choice until we get new information on the vaccine, earnings, election and stimulus,” said Thomas J. Hayes, chairman of hedge fund Great Hill Capital in New York. “Until then, the dollar is likely to have bottomed in the short term.”

Adding to investor concerns is data showing record new coronavirus cases in Europe, and on Friday, the U.K. added London to its watchlist of potential pandemic hot spots. That’s crimping optimism that economic growth in Europe will materially outpace that of the U.S.

“There’s been a clear erosion of the idea that Europe was ‘doing better’ than the U.S.,” said Kit Juckes, chief currency strategist at Societe Generale. Consensus growth differentials have “moved in the U.S.’s favor.”

Still, history cautions that a further advance in the dollar is far from certain. The U.S. currency also rallied in June but quickly gave back its gains as concerns about the global economic outlook receded.

The U.S. Federal Reserve’s lower-for-longer rates strategy is also likely to “put pressure on the dollar,” Quentin Fitzsimmons, portfolio manager at T. Rowe Price, wrote in a note.