By Maiya Keidan and Saikat Chatterjee
LONDON (Reuters) - Hedge funds are looking past the euro's drop this week and remaining bullish, encouraged by an improved economy and political stabilisation.
The single currency has been the standout trade in foreign exchange markets this year, climbing more than 12 percent against the dollar in 2017. Long positions in the euro are now at their greatest in five years, positioning data show.
Investors have raised their bets on expectations the European Central Bank will start unwinding its multi-year stimulus plans in the coming months. .
The outlook for closer political union may have dimmed after support for the far right surged in German elections last week. But hedge fund managers believe the euro's economic prospects remain relatively better than, say, the U.S. dollar's.
"Our view on the euro is that it is going to up, and it’s primarily based on the fact that (ECB President) Mr. Draghi is way behind where the American Fed is," said Alex Roepers, chief executive at $1.3 billion (972.18 million pounds) Atlantic Investment Management.
"He needs to raise rates, and the moment he gives up on zero interest rates, the euro will rally and I think it will go to $1.30."
The euro has fallen nearly 3 percent after peaking at a 2 1/2-year high near $1.21 earlier this month. The main reason for the loss was the dollar's rebound this week after the Trump administration released its tax plans and Federal Reserve officials make some hawkish comments about U.S. interest rates.
Euro bulls are undeterred.
"Europe is at an early stage of economic recovery and has a large current account surplus," said Borut Miklavcic, CIO and managing partner at LindenGrove Capital, who is "very optimistic" on the euro.
With the euro zone economy now growing for the 17th straight quarter, the ECB is expected to wind down its stimulus efforts, starting next year, even if inflation looks likely to remain below the bank's near 2 percent target for years to come.
Data on Friday showed inflation in the 19-member currency bloc held steady at 1.5 percent in September.
"Europe reminds me a lot of Japan with declining demographics and a huge amount of savings," said Russell Clark, a partner at $1.2 billion Horseman Capital Management, who expects the euro to remain strong.
(Reporting by Maiya Keidan and Saikat Chatterjee; Editing by Larry King)