(Bloomberg) — Investors speculating the dollar rally is fizzling out may be overlooking trillions of reasons why it will keep on going.

Thereâs pent-up demand for the U.S. currency that will underpin years of appreciation because the world is âstructurally shortâ the dollar, according to investor and former International Monetary Fund economist Stephen Jen.
Sovereign and corporate borrowers outside America owe a record $9 trillion in the U.S. currency, much of which will need repaying in coming years, data from the Bank for International Settlements show.
In addition, central banks that had reduced their holdings of the greenback are starting to reverse course, creating more demand. The dollarâs share of global foreign reserves shrank to a record 60 percent in 2011 from 73 percent a decade earlier, though itâs since climbed back to 63 percent.
So, the short-term ebbs and flows caused by changes in Federal Reserve policy or economic data releases may be overwhelmed by these larger forces combining to fuel more appreciation, according to Jen, the London-based co-founder of SLJ Macro Partners LLP and the former head of currency research at Morgan Stanley.
Dollar âPowerâ
âShort-covering will continue to power the dollar higher,â said Jen, who predicts a 9 percent advance in the next three months to 96 cents per euro. âThe dollarâs strength is not just about cyclical factors such as growth. The recent consolidation will likely prove to be temporary.â
Most strategists and investors agree on the reasons for the dollarâs advance versus each of its major counterparts during the past year: the prospect of higher U.S. interest rates while other nations are loosening policy.
Bloombergâs Dollar Spot Index, which tracks the U.S. currency against 10 major peers including the euro and yen, has surged 20 percent since the middle of 2014. The gains stalled recently, sending the index down more than 3 percent in the three weeks through April 3, as Fed officials tempered investorsâ expectations about the pace of rate increases.
Top Forecaster
Jen isnât the only one who thinks short-dollar positions will cause the rally to extend.
Chris Turner, head of foreign-exchange strategy at ING Groep NV, sees the dollar surging through parity with the European currency by mid-year, from $1.0530 per euro as of 7:05 a.m. in New York. He said gains will be spurred by bonds from Germany to Ireland yielding below zero.
âCentral banks are re-accumulating their dollar reserves and low, or negative, bond yields in the euro zone will probably speed up that trend,â said London-based Turner, whose bank topped Bloombergâs rankings for the most accurate currency forecasts in the past two quarters.
Not everyone thinks the dollar will keep on climbing. Billionaire Bill Gross of Janus Capital Group Inc. called his contrarian bet against the greenback âthe trade of the year.â His short is premised on the spread between U.S. and European interest rates narrowing.
Adrian Lee, whose eponymous investment company oversees more than $5 billion, disagrees. He points to monetary policy as the biggest driver of dollar strength as the tightening bias of the Fed contrasts with a European Central Bank thatâs expanding the money supply.
Rate Outlook
âThe dichotomy between Europe and the U.S. is most interesting,â said Lee, chief investment officer at Adrian Lee & Partners, which has offices in London and Dublin. âIf you ask where our strategy would be in a yearâs time, we can easily have a forecast of the euro well below $1.âÂ
He also sees another structural factor thatâs underpinning the dollar: the U.S.âs shrinking current-account deficit.
The decline in oil prices — even with the shale-gas revolution, the nation is still an importer — has helped the U.S. reduce its trade shortfall to 2.3 percent of gross domestic product, according to data compiled by Bloomberg. Thatâs down from a record 5.9 percent in 2006.
For Jen, the rise in dollar-denominated debt across the globe is key. The $9 trillion owed by borrowers outside the U.S. has surged from $6 trillion at the end of 2008 — when the Fed cut its benchmark interest rate to near zero, making it cheaper to issue in the currency.
Repaying Debt
Russian gas producer OAO Gazprom, Spanish phone company Telefonica SA and ArcelorMittal, the worldâs largest steelmaker, have each raised about $12 billion in the U.S. currency since then, data compiled by Bloomberg show. France and Sweden are among the biggest sovereign issuers, borrowing more than $100 billion between the two.
Some of that will need to be repaid even if the remainder will be rolled over. And debt that will eventually be refinanced needs servicing in the meantime.
âAfter years of accumulating a huge amount of debt in dollars, borrowers will need to figure out how to repayâ given the currencyâs recent gains, Jen said. âPeople will either repay early or start hedging actively. Thereâll be huge demand for the dollar that is much more than whatâs consistent with growth or interest-rate differentials.â