The U.S. dollar jumped to long-term highs against the euro and
yen Tuesday, accelerating a two-month rally on expectations that
U.S. monetary stimulus is near an end as Europe and Japan press
ahead with their own.
The dollar climbed to 104.86 yen, the highest in seven months,
while the euro dropped as low as $1.3113, the lowest in a year.
The dollar advanced in recent months as a raft of improving U.S.
economic data rolled in, from improving consumer confidence to
better labor market conditions. U.S. Federal Reserve officials
signaled late last month that they were on track to end their
extraordinary monetary stimulus, dubbed quantitative easing, in
October. Quantitative easing in recent years pushed Treasury yields
to record lows.
By contrast, investors say the European Central Bank, which
meets Thursday, may further cut interest rates or undertake
additional stimulus measures, including an asset-backed
securities-purchase program, as the region's economy sputters. On
Monday, data showed manufacturing activity in the eurozone in
August slid to its lowest since last September.
"The market is coming to the view that the U.S. dollar will be
stronger, " said Khoon Goh, a currency strategist at ANZ in
Singapore. There's a "divergence in the outlook for monetary policy
and that is supportive of the U.S. dollar and bearish for the
euro."
He forecast the euro to keep falling and the U.S. dollar to rise
based on his expectation that the Federal Reserve will raise rates
sooner than expected. Higher interest rates will likely boost
Treasury yields and increase the allure of dollar-denominated
bonds.
He's not alone. Bets that the dollar will climb against the
euro, yen and pound increased for the sixth consecutive week--to a
net $23.4 billion on futures contracts--during the week ending Aug.
26, according to the Commodity Futures Trading Commission. Bets
against the euro increased by $1.7 billion to a net $21.6 billion,
the highest since June 2012.
If the ECB continues or advances its easy-money policies when it
meets in Frankfurt on Thursday, the euro's downward trend will
continue, said James Brodie, chief investment officer of Sherpa
Funds, a currency fund in Singapore.
"The long-term trend [for the euro] is lower," he said.
Still, Mr. Brodie said he recently cut his bets against the euro
versus the dollar because it has become a crowded trade.
Bigger-picture macroeconomic fundamentals are starting to drive
the currency markets, said Christopher Brandon, founding partner of
Rhicon Currency Management in Singapore.
"We may start seeing more sensitivity to big economic releases,"
he said. "This should all create more volatility as we break out of
the unbelievable complacency that has played markets for the last
year."
Mr. Brandon said he recently started buying dollar positions
against the yen and is short the euro.
He said he will also watch to see whether the U.S. dollar's
strength against the euro and yen translate into strength against
the Australian dollar, the pound and other major currencies, which
could become a broader market theme for the last quarter of
2014.
Write to Anjani Trivedi at anjani.trivedi@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires