Yield-Fueled Dollar Surge Fails to Discourage Greenback Bears

(Bloomberg) -- The dollar’s climb to a three-month high on the back of advancing Treasury yields is failing to shake some strategists’ conviction that the U.S. currency is bound to head lower.

While the Bloomberg Dollar Index has gained about 2 percent in the past week, Nomura Holdings Inc. expects the upswing to be short-lived, according to a note from strategist Bilal Hafeez.

The main reason is that the bank sees rising commodity prices as the trigger for higher U.S. yields, driven primarily by trade tensions and geopolitical worries, rather than global demand. He also points to weakness in risk-sensitive U.S. markets such as equities and credit at the same time the dollar has been strengthening.

“The dollar is rallying in a negative environment,” according to Hafeez. Although this could continue for weeks, “it doesn’t suggest a turn in the medium-term dollar downtrend.”

Nomura recommends selling the dollar against the yen to hold onto a core short position.

The Bloomberg dollar index has pared its 2018 loss to about 1.5 percent, following a decline of around 8.5 percent in 2017. It slipped 0.1 percent Tuesday even as the U.S. 10-year yield briefly exceeded 3 percent for the first time since 2014. The euro and pound were among the currencies gaining, while the yen led declines.

Scotiabank strategists Shaun Osborne and Eric Theoret also remain downbeat on the U.S. currency.

“Despite the USD’s rebound in the past few days, we remain bearish on the broader outlook for the currency,” they said in a note Tuesday. While they recognize some risk for the bearish view because of a buildup in short bets against the greenback, dollar gains “should remain relatively limited in scale and duration.”

To contact the reporter on this story: Ivan Levingston in New York at ilevingston@bloomberg.net.

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum

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