Janet Yellen is turning from currency traders’ best friend to their biggest foe.
The most popular trade in the $5.3 trillion-a-day foreign-exchange market has been betting on a stronger dollar, leaving investors exposed when the Federal Reserve chair damped speculation last month of an imminent increase to interest rates. As the dollar slowed its advance, an index of currency returns snapped a record winning streak, prompting traders to reassess how much higher the greenback can go.
“Currency managers had been doing well because they’ve been long dollars, and the dollar had been pretty much on a straight-line trajectory higher,” said Adam Cole, the global head of currency strategy at RBC Capital Markets in London. The dollar’s slowdown is “a major factor behind returns looking less positive,” he said.
While Bloomberg’s Dollar Spot Index climbed to a record on Tuesday, the measure is rising at the slowest pace since June and speculators including hedge funds are paring bets on how much the currency will strengthen. Yellen told Congress last week she won’t be locked into a timetable for boosting borrowing costs, just days after minutes of the Fed’s January meeting underlined the damage a stronger dollar can do to the economy.
Parker Global Strategies LLC’s gauge of 14 top currency funds fell 0.1 percent in February, ending seven months of gains, the longest run in data going back to 2003. The index rose to a 3 1/2-year high in January as investors boosted long-dollar positions, or bets the U.S. currency would appreciate.
That wager worked out until the Fed undermined speculation it was planning to raise its zero-to-0.25-percent target rate in the next couple of policy meetings.
The minutes of its more recent gathering, published Feb. 18, described the strong dollar as “a persistent source of restraint” on U.S. exports, while Yellen told lawmakers on Feb. 24-25 not to assume an increase was imminent if the Fed drops a pledge to be “patient” on tightening policy.
The resulting pause in the dollar “accounts for some of that disappointment in the performance” of foreign-exchange funds, said Ian Stannard, Morgan Stanley’s head of European currency strategy in London.
Longer-term, though, he said the strong-dollar “trend should stay in place,” and predicted a gain of about 20 percent on a trade-weighted basis during the next three years.
Bloomberg’s dollar index — which tracks the greenback against 10 major peers including the euro, yen and pound — rose 0.4 percent last month, the smallest advance since it declined in June. The gauge had surged 16 percent from the middle of last year through the end of January. On Tuesday, it edged to its highest level since data began in 2004.
The prospect of the Fed’s first rate increase in almost a decade has lured cash to the dollar as other central banks across the globe ease. Policy makers from the euro region to China and Canada have been lowering borrowing costs or circulating unprecedented amounts of money in their economies, which tends to debase their currencies.
The dollar is forecast to strengthen versus all but four of its 31 major peers by Dec. 31, according to strategist estimates compiled by Bloomberg. At the end of last year, it was predicted to drop against 13 of them.
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