Dollar bears are getting nervous. Only a few weeks ago, the US currency was sliding towards record lows. It has since rebounded, a move some believe could herald a sustained recovery as the Federal Reserve pulls the plug on the cheap money it has pumped into financial markets.
Many investors remain short dollars, especially against commodity-linked and Asian currencies. But dollar bears are trimming positions before the end of June, when the Fed ends its second round of “quantitative easing”, dubbed “QE2”.
Since the Fed began buying bonds – its aim being to bring down borrowing costs and breathe life into the US recovery – the dollar has declined significantly. The effect was to flood the banking system with free reserves. Thus the dollar became an attractive way to fund “carry trades”, in which low-yielding currencies are sold to finance the purchase of higher-yielding assets such as commodities, equities and commodity-linked currencies.