Only twice before since the introduction of the euro has the tide of fast cash lifting the single currency and submerging the dollar been this strong.
The question today is whether the present trend continues and the euro sails higher, as it did in 2007, or reverses, as it did in 2011. Up to now, the signs are that it could be the former.
Figures from the U.S. Commodity Futures Trading Commission (CFTC) show that hedge funds and other speculators now hold the largest net long euro position since May 2011. The general short dollar position is the biggest in over three decades.
Traders are betting that the European Central Bank will shortly begin phasing out its bond-buying quantitative easing program, although expectations of another U.S. interest rate are quickly evaporating.
Net long euro positions climbed to 96,309 contracts in the week to Tuesday, a rise of almost 10,000 over the previous week. Barring one week in May 2011 when web longs topped 99,000 contracts, that is the highest since the first half of 2007.
That is a collective bet worth over $14 billion.
Just over ten years ago euro long positions topped 100,000 contracts, attaining a record in May that year only below 120,000. The euro/dollar exchange rate went from approximately $1.36 up to what remains a record high above $1.60 in April 2008.
It was a different story in 2011 when longs reached 99,500 contracts in May that year and the euro was nudging $1.45, a summit that hasn’t been visited since. Indeed, the euro went on a multi-year decline that nearly saw parity breached late last year.
How will it play out this time around? Analysts at Swiss bank UBS notice that the euro is now enjoying its strongest rally against the dollar since 2009, up more than 15 percent from that December 2016 low.
The euro’s winning streaks usually fizzle and turn once they reach the 10-15 percent mark. An exception was 2007, when a 10-per-cent increase was followed by another 10-per-cent upswing.
“The euro’s popularity is showing little sign of waning,” Rabobank analysts said on Monday.
ECB President Mario Draghi stated last week that “recent volatility in the exchange rate represents a source of uncertainty that requires tracking,” a view echoed on Monday by ECB board member Benoit Coeure.
Yet regardless of the euro hitting a three-year high against the dollar over $1.20, it’s nonetheless 40 cents below its record and not much higher than its initial launch rate of $1.1747. On a trade-weighted foundation, the euro is up just 5 percent this year, nearly a third of its rise against the dollar.
Although Mr. Draghi addressed the euro’s rise in his press conference after last week’s ECB policy assembly, it hardly seemed like verbal intervention of older. In November 2007 his predecessor Jean-Claude Trichet said the euro’s rise was “sharp and surprising” and said that “barbarous moves” were always unwelcome.
Perhaps Mr. Draghi will want to bare his teeth just like Mr. Trichet did before hedge funds and speculators feel pressured into cutting back their bullish euro stakes to any great degree.