Dollar Under Pressure After Shake Out Of Crowded Bullish Positions

The dollar nursed hefty losses on Wednesday following a brutal shakeout of bullish positions as investors found incentives to take profits as the year-end loomed.

Spooking markets, political uncertainty in Greece appeared to have reignited worries about Europe, prompting a slide in equities and flight to safety into U.S. Treasuries US10YT=RR. That drove yields lower, which in turn knocked the dollar index .DXY off a near six-year perch.

The greenback slid to 118.780 against the yen JPY=, a safe-haven destination in its own right, having dropped more than 2 percent at one stage to 117.90 in a vicious turnaround from a seven-year peak of 121.86 set on Monday.

The euro rallied as far as $1.2448 EUR= from a two-year trough of $1.2247, but has since been cooling its heels at $1.2392.

“Anyone who bought USDs at the start of this week after Friday’s NFP and ECB QE jaw-boning has been hosed,” said Gavin Friend, senior markets strategist at National Australia Bank.

The Greek government brought forward a crucial presidential vote to next week that would force nearly two dozen independent lawmakers to decide whether to side with Prime Minister Antonis Samaras’ pro-bailout government or leftist radicals who have vowed to tear up the bailout.

In the wake of the Greek developments Tokyo’s Nikkei .N225 dived 2.8 percent, pulling away sharply from a 7-1/2 year high scaled at the start of the week.

Yet, traders said the moves overnight were driven more by position adjustments rather than a sudden change in the fundamental view.

“The drop by dollar/yen was shocking. It was a reminder of how scary the market can become when positions are tilted suddenly in one direction,” said Bart Wakabayashi, head of forex at State Street in Tokyo.

“The dollar’s climb in October and November was very steep, so adjustments like this were bound to happen. Equities are going through similar phase after their rally. So far I see it more as position adjustments rather than a more significant change leading to ‘risk off’ moves,” he said.

Indeed, Friday’s upbeat U.S. nonfarm payrolls data only served to highlight the diverging outlook between the United States and most of the developed world.

On Monday, Atlanta Federal Reserve Bank President Dennis Lockhart said the Fed should still be on track to begin raising interest rates in the latter half of 2015, a dollar-positive view held by the market for some time now.

With the greenback on the back foot the Australian dollar bounced off multi-year lows, although downbeat Chinese inflation data capped the currency’s rebound.

The Aussie is sensitive to changes in the economic fortunes of China, its key export destination.

The Australian dollar flew as high as $0.8371 AUD=D4 from a 4-1/2-year trough of $0.8223, before lapsing back to $0.8320.

China’s annual consumer inflation eased to a five-year low of 1.4 percent in November from 1.6 percent in October, signaling persistent weakness in the world’s second-largest economy.

Source : Reuters