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Dollar looks to sail out of the doldrums

A decade ago, Gisele Bündchen caused a stir in currency markets rather than on the catwalk when her agent said the Brazilian supermodel would prefer to be paid in euros rather than dollars. Today the situation looks similar, even if Gisele has hung up her heels.

The greenback has sagged lower against all its major world counterparts in 2017 as initial expectations of a “Trump bump” have unravelled.

The DXY dollar index was even briefly in correction territory this week, having fallen 10 per cent from its cyclical high.

After the longest streak of losing months in over 14 years, the gauge is looking at its eighth worst yearly performance in at least four decades.

The dollar doldrums is also partly due to the ebullience of many of its biggest counterparts — chiefly the euro, which enjoyed a vigorous bounce after Emmanuel Macron won the French presidential election and more recently as investors speculate that the European Central Bank is preparing to trim its quantitative easing programme.

Nonetheless, the rout now looks overdone and the US currency appears primed for a comeback, given the technical positioning of investors.

Investment funds last year wrongly ramped up their bets on the greenback climbing, but according to CFTC data they are now net “short” for the first time since mid-2014 — after which the US currency went on a wild rally.

Sentiment is also shifting. Investors surveyed by Bank of America say betting against the dollar was one of the most crowded trades in markets. This marks an abrupt volte-face: for most of 2017, the “long dollar” wager has been fingered as the most crowded trade.

There are several possible catalysts for a renaissance. While inflation has remained dormant, the Federal Reserve looks set to start reducing the size of its balance sheet later this year, and another interest rate increase looks possible. Bouts of risk aversion are also a typical dollar boon.

Or we could see another supermodel shun the dollar. The euro tumbled more than 15 per cent versus the greenback in the year after Gisele’s ill-timed stipulation. The lesson is that you dis the dollar at your own peril.

robin.wigglesworth@ft.com