(Repeats Friday's story without changes)
By Jamie McGeever
LONDON, Oct 12 (Reuters) - This week's wobble on Wall Street aside, the U.S. economic and stock market outperformance relative to the rest of the world and the rise in U.S. bond yields has, unsurprisingly, lifted the dollar.
This also masks a divergence within the greenback itself: it is performing far better against emerging market currencies than developed world currencies.
Since June the 10-year U.S. Treasury yield has risen to a seven-year peak above 3.25 pct, the Fed has raised rates twice and signaled more to come, Wall Street has hit fresh highs and U.S. growth has chugged along nicely.
In that time the dollar has inched up 1 percent against a basket of six major currencies, but has appreciated some 4 pct against emerging market currencies.
The relatively lackluster performance against major currencies, therefore, is baffling, especially as the dollar is enjoying the widest yield advantage over Germany, Britain and Japan in years, in some cases decades.
Both the two- and 10-year U.S.-German spreads are the widest in 30 years; the U.S.-UK 10-year spread is the widest since the mid-1980s and the two-year spread is the widest since the early 1990s; both short- and long-dated U.S.-Japanese spreads are the widest in a decade.
Emerging market yield spreads over Treasuries have widened significantly this year. But of course, there are good reasons for that, namely unpalatable risk and turmoil in emerging economies. Overseas investors have dumped EM bonds accordingly.
What makes the dollar's schism even more puzzling is the divergence in market positioning, which intuitively points to dollar outperformance against G10 FX, not emerging currencies.
According to Commodity Futures Trading Commission figures, hedge funds and speculators hold a huge net long dollar position against G10 currencies, but are short dollars against EM FX.
The net long position against G10 is now worth nearly $29 billion, the biggest in almost three years. The short position against EM is understandably much smaller, given it's a far less liquid market, and stands at $1.27 billion.
The positioning shift since June, when the dollar started motoring against EM currencies, underscores that conundrum. Funds and specs flipped to net long dollars vs G10 worth $28.7 billion from a $7.9 billion net short, and to a $1.27 bln net short against EM currencies from being $811 million net long.
That's a major shift, and a sizeable bet that hasn't really paid off. What gives?
According to Robin Brooks at the Institute of International Finance, much of the dollar's relative underperformance against G10 currencies is down to oil.