Bank of America Says FX Traders May Be Off on Dollar Bearishness

The dollar’s four-session winning streak, its longest since December, may be a harbinger of things to come, according to Bank of America Merrill Lynch Global Research.

Despite resoundingly bearish sentiment on the U.S. currency, the greenback has climbed 0.8 percent this month, trimming its loss for the year to 2.7 percent. The rally hasn’t swayed many investors: hedge funds and money managers remain more net short the dollar than average over the past year, according to Commodity Futures Trading Commission data. 

They’re positioned for more dollar losses on speculation that global central banks will soon follow the Federal Reserve in paring back post-crisis stimulus, which would strengthen their currencies relative to the U.S. Those investors might be too aggressive in anticipating that action, Bank of America says.

“The market could be wrong by pricing monetary policy convergence too early,” Athanasios Vamvakidis, a foreign-exchange strategist at the bank, wrote in a note. “We argue that inflation in the U.S. will increase this year, most likely above what markets expect, and that this will be positive for the USD.”

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