London

THE US dollar rallied to a five-month high on Monday as relief over the fading risks of an outbreak in China-US trade war prompted investors to cut their short positions against the greenback.

Market players cut their US dollar short positions for the fourth consecutive week, reducing the net outstanding short positions to its lowest since the start of the year, latest positioning data for the week ending May 15 showed. "While the dollar is trading near the upper end of its recent trading ranges, the rally may have further room to run given the extent of short positions in the market," State Street Global Advisors head of macro strategy Timothy Graf said.

The overall size of short dollar positions has fallen to about US$11 billion from a near seven-year high of nearly US$28 billion in late April as hedge funds rushed to cover their short positions, sending the US dollar surging.

Against a basket of its peers, the US dollar rose 0.4 per cent above 94 briefly for the first time since late December 2017. It was trading at 93.84 in late morning trade.

BMO Financial Group European head of FX strategy Stephen Gallo said in a note that long dollar positions are now joint third biggest, along with long Japanese yen, in G-10 foreign exchange trading.

But that unwinding has not been uniform. JPMorgan strategists believe that while leveraged accounts have broadly unwound their short dollar bets, asset managers "have yet to meaningfully capitulate".

This week will bring about a further test for stubborn euro bulls with the release of May flash PMI data on Wednesday where markets will be waiting to see whether the first-quarter slowdown in Europe has spilled over to the subsequent months.

The US dollar rally over recent weeks has taken currency markets by surprise, rising 5.4 per cent in just over a month. It was the currency's biggest gain since the last quarter of 2015, when the US Federal Reserve was preparing markets for its first interest rate increase since the financial crisis of 2008.

The euro fell half a per cent on the day to US$1.1717, its lowest since late November, as a sell-off in Italian bonds spread to other peripheral bond markets in Europe.

Elsewhere, sterling slumped half a per cent to US$1.3412, its lowest since Dec 28, as markets prepared for data this week that may decide whether the Bank of England will raise interest rates at all this year. REUTERS