US dollar hits four-month peak on caution spurred by hedge fund default

NEW YORK: The dollar climbed to a four-month peak on Monday in choppy trading, with the euro languishing below $1.18 and commodity currencies falling, as the currency drew some safe-haven bids on concerns about the potential fallout of a hedge fund's default on margin calls.

The dollar index, a measure of the greenback's value against six other major currencies, hit as high as 92.964, its strongest level since November. It was last up 0.1% at 92.904.

The S&P 500 and the Nasdaq index fell after global banks said they faced potential losses from a hedge fund's default, identified as Archegos Capital, which analysts said was tied to big US media and Chinese tech companies.

"The dollar is rising on safe-haven buying," said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto. "Traders are afraid that a mini-LTCM (Long Term Capital Management) is underway, and are trying to get out from under the falling dominoes."

LTCM was a large US hedge fund that collapsed in 1998 due in part to highly leveraged strategies, forcing a bailout from the US government.

The euro, meanwhile, struggled on Monday as the prospect of tougher coronavirus curbs in France and Germany dimmed the short-term outlook for the European economy.

The single European currency slipped 0.2% to $1.1769, after earlier dropping to $1.1760, its lowest since November. On a monthly basis, it was down 2.5%, its biggest fall since July 2019.

Compounding the euro's woes have been the widening differentials between German and US yields.

The spread for 10-year debt widened to 200 basis points from 150 basis points at the start of the year, boosting the dollar amid US outperformance on vaccinations and the overall economy.

Cambridge's Schamotta said there was quarter-end position-squaring on Monday as well, with investors covering previous short positions on the greenback as the US economy improved. The more upbeat view has fueled expectations the Federal Reserve could raise US interest rates earlier than expected.

"The short-dollar consensus that prevailed in January has collapsed, and participants are increasingly awake to the possibility of continued strength in the greenback over the quarter ahead," Schamotta said.