Dollar bulls exude patience and wait for sunny data

Betting on further strength for the US dollar has become a crowded trade in the parlance of traders and such positioning means plenty rides on the US economy gaining traction in the coming months.

The resolve of dollar bulls has been tested by a recent string of lacklustre economic data that has vindicated the message from the bond market - namely that higher interest rates from the Federal Reserve are not likely to start in June and may well not become a story until 2016.

As a harsh US winter fades, investors betting on the dollar rising further may well require a great deal of patience. The dollar was again being tested on Wednesday by data showing a surprisingly sharp decline in industrial sector activity.

But a sign that dollar bulls are digging in for the long haul can be seen in how pullbacks in the reserve currency are shortlived, as buyers swiftly emerge at cheaper levels.

Stephen Jen, head of currency hedge fund SLJ Macro, remains a dollar bull despite what he calls some of the "terrible" negative data.

"I'm in the camp that believes it's more likely that the US economy is still healthy, and that we will see a re-acceleration of the data," says Mr Jen.

Many seem to share that view and after the dollar fell 1 per cent against the euro - the most traded pair in the currency market - following disappointing retail sales data on Tuesday, buyers emerged, thus repeating a regular pattern of late.

A dismal set of jobs data released on Good Friday sent the euro back above $1.10, but by the end of last week it had retreated to $1.06.

Alan Wilde, head of fixed income and currency at Barings, says some consolidation had looked likely after the Good Friday jobs debacle.

"But the dollar is on a tear again," he says. "There are people who want to play that as the only game in town."

Enthusiasm for the dollar has been led by macro hedge funds, enjoying their best quarterly returns relative to US equities in four years, while investors betting on higher eurozone and Japanese share prices have sought currency insurance via exchange traded funds.

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At the very least, some investors are rethinking their dollar view, according to Bank of America Merrill Lynch. Its April survey for fund managers found that a net 13 per cent believed the dollar was overvalued. The previous month, a net 12 per cent felt the dollar was undervalued.

And yet the survey also noted that most fund managers still believe the dollar will continue to rise this year.

Helping sustain support for the dollar after short bouts of weakness is the recognition that the currency may only be in the early stages of a long-term uptrend.

According to Ugo Lancioni, currency manager at Neuberger Berman, dollar strength since last year has forced many US institutional investors to review their long-term hedging strategies.

"It is possible that many of them, late in the game, are still looking for opportunities to buy the dollar on dips," Mr Lancioni says.

As the market waits for a clearer signal on US data, there is no sign of a decisive breakout from the $1.05 to $1.10 range that the euro-dollar pair has resided in of late, according to Paul Meggyesi, currency strategist at JPMorgan.

"It pings from one end to the other. If it can't go down on weak data, then it goes up," he says.

A break of this range and any move towards parity between the euro and the dollar depends on whether the US economy regains momentum.

<>The US slowdown may be transitory, and the poor data caused by weather-related issues and other one-off factors, Mr Jen argues. He points out that the retail sales data, though undershooting on expectations, still recorded the best month-on-month growth since March 2014.

Alan Ruskin, Deutsche Bank strategist, believes the dollar run is still being fed by euro weakness. "It is not obvious we are going to segue so nicely from ECB-led dollar strength to Fed-led dollar strength," he says.

He and dollar bulls are looking to the skies for clues to the next dollar phase.

"It's a question of time, and how much the weather is interacting [with the US economy]. If we still don't see the April data respond, the markets' inclination would be that it's more than the weather [influencing the economy]."

For the crowd of investors betting on dollar strength, that is not a desirable outcome.

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