For many dollar bulls their timing has sucked. This week saw many of those bull position bleed that bit more, so much so, that countless of investors decided to pare back their open exposure or in fact close their ‘long’ dollar positions altogether, at least until things become more clearer.
Dollar bulls expecting to score on the back of diverging rates between a hawkish Federal Reserve and dovish European Central Bank (ECB) are the ones that mostly got smacked about. With the release of the dovish FOMC March meeting minutes, and Fed Chair Janet Yellen’s recent remarks highlighting “considerable slack” in the economy had many long-dollar positions seeing red as the market drastically priced out an early rate hike by the Fed.
Rubbing salt into the wounds of the dollar bull that happened to exit their long positions, was the news on Friday that March’s higher than expected PPI print (+0.5%) gave the dollar a boost against many of the G7 currencies. The inflation print incited hopes that the Fed would curb its stimulus efforts sooner rather later (discarding the dovish rhetoric slack comments from Yellen). The FOMC minutes this week said it would need to see higher inflation alongside an increase in employment before the Fed would consider higher interest rates. Producer prices like this indicate that US inflation pressures are building.
Perhaps it’s an added incentive for the Fed to raise rates faster than originally thought or perhaps speed up the pace of tapering. Higher rates favor a stronger dollar.
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