NEW YORK (AP) — The dollar staged a strong corrective rally against its major rivals in U.S. trading Wednesday from new lows overnight as investors, particularly hedge funds, pared back bets theU.S. currency will sink much further in the immediate term.
The sharp rebound brought the euro, sterling and Australian dollars crashing from their lofty peaks and lifted the dollar up through 107.00 yen for the first time in a month.
The dollar’s recovery, which some market participants said was aided earlier in the U.S. session by yen-selling intervention from Japanese monetary authorities, was driven by a broad range of players including Commodity Trading Advisors, speculators, corporates and a host of funds.
Traders say the massive dollar-buying from hedge funds Wednesday was the main driver and could be considered a turning point in the dollar’s downtrend.
“The market doesn’t like being long (euros) at the highs but more importantly hedge funds who went long (of euros) at $1.1860 in November started to take profit (Wednesday),” said Craig Russell, senior dealer at Alaron FX in Chicago.
The senior dealer at a German bank in New York also noted the heavy buying back of dollars by hedge funds.
“Technically, it’s a very bullish day for the dollar,” he said, citing the euro’s break below trendline support at $1.2765.
It’s unclear if the hedge funds are actually going long of dollars at this stage but they are certainly cashing in on the short dollar positions they’ve held for several months, dealers said.
“Macro funds like to make a 1,000 basis point (profit), and they got that (Wednesday),” said Russell at Alaron FX, referring to the accelerated long liquidation on euro positions at around $1.2860.
“The dollar is now likely to fall back into recent ranges, including $1.2320-$1.2925 in euro/dollar,” wrote Tim Mazanec, currency strategist at Investors Bank & trust in Boston, in a research note late Wednesday.
At 4:30 p.m. (2130 GMT), the euro was at $1.2675, sharply down from $1.2835 late Tuesday in New York and even weaker still compared to its new lifetime high of $1.2930 reached earlier Wednesday.
Sterling was also sharply weaker at $1.8863 from $1.9047 late Tuesday and the fresh 11-year high at $1.9140.
The dollar was up at 1.2432 Swiss francs from 1.2271 francs late Tuesday, and over a yen stronger at 106.80 yen from 105.67 yen. The dollar’s surge against both the yen and euro limited the euro’s move on the day against the yen. The single currency, after hitting a month-high of 136.55 yen overnight, settled modestly lower at 135.30 yen from 135.74 yen late Tuesday.
The euro came under selling pressure almost as soon as it took out options-related resistance at $1.29. More warnings from European officials against the currency’s strength, this time from German Economics Minister Wolfgang Clement calling for a “reasonable and bearable” exchange rate, took the wind out of its sails.
The gathering pace of the euro’s decline also extended to sterling, particularly after Bank of England Deputy Governor Rachel Lomax said further interest rate hikes in the U.K. can’t be taken for granted.
“There can be no foregone conclusions when it comes to setting interest rates,” Lomax said in her first speech as deputy governor. The release Wednesday of the latest Monetary Policy Committee minutes showed a 9-0 unanimous vote in favor of the last hike.
Meanwhile, the dollar’s spike to new one-month highs against the yen at 107.10 yen could well have been helped by Japan’s Ministry of Finance via at least two Japanese banks.
“I’m pretty certain it was intervention as they (Japanese monetary authorities) are trying to force the issue and back the dollar away from 105.50 yen as best they can after the great GDP number,” said Enrico Caruso, senior dealer at Tempest Asset Management in Irvine, California.
Wednesday, Japan’s government announced that the economy grew a real 1.7 percent in last quarter of 2003 from the previous period, or 7.0 percent in annualized terms, beating a market consensus of on-quarter growth of 1.2 percent and marking the fourth straight quarter of growth. The expansion was the fastest in 13 years.
On the back of these figures, capital flows into Japan should pick up from their already stellar pace, suggesting any yen-selling intervention from Japanese monetary authorities Wednesday could have been preemptive.
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Jamie McGeever is a correspondent for Dow Jones Newswires.
