By sparking a dollar rally over the past week, the Federal Reserve has saved the smart money in the $5.3 trillion-a-day foreign-exchange market from its first monthly loss since June.
A Parker Global Strategies LLC index tracking 14 top currency funds has jumped 1.6 percent since Oct. 28, a day before U.S. central bankers said they may raise interest rates sooner than anticipated if the jobs market keeps improving. Both that measure and the Bloomberg Dollar Spot Index, which rose to a 5 1/2-year high yesterday, had been poised to end a three-month winning streak until boosted by the Fed’s optimism over the economy.
“The Fed move has reignited the dollar,” Ian Stannard, the head of European foreign-exchange strategy at Morgan Stanley in London, said yesterday by phone. “When you do get setbacks, a good strategy would be to use those setbacks to build those positions, certainly if you
have a longer-term bullish view for the dollar in place.”
Large speculators such as hedge funds are well placed to take advantage of the rally, with more money wagered on a dollar advance than ever before, data from the Commodity Futures Trading Commission in Washington show.
Other Side
Those on the other side of the bullish-dollar wagers are typically longer-term investors such as pension funds, for whom the daily ups and downs of an asset have less impact.“The contrarian traders are usually real money,” Mark McCormick, a foreign-exchange strategist in New York at Credit Agricole SA, said yesterday by phone. “The hedge funds are usually the quick-expedient people picking up the new trades and driving momentum for big moves.”
Hedge funds and other large speculators pushed aggregate net bets on a greenback advance versus eight peers including the euro, yen and Swiss franc to a record 345,633 contracts in the week ending Oct. 28. They were anticipating a dollar decline as recently as July, CFTC data show.
The WisdomTree Bloomberg U.S. Dollar Bullish exchange-traded fund, which started less than a year ago, had an inflow of $83 million the day before the Fed statement, more than doubling its size to $152 million.
Trading Peers
Bloomberg’s dollar gauge, which tracks the U.S. currency against 10 major trading counterparts, closed at 1,088.07 yesterday, the highest level since April 2009. Back then, the Fed was just starting its unprecedented rounds of asset purchases that weakened the dollar and only ended last month. The greenback is 6.7 percent higher on the year and set for its best performance since 2008.The index had slipped 0.7 percent in October before the Fed’s Oct. 29 statement as concern mounted that global growth was faltering, threatening the U.S. recovery and eroding appetite for dollar-denominated assets.
The greenback’s rally helped boost the Parker fund index to a 1.5 percent gain this year following three straight years of losses. That’s a welcome respite for a foreign-exchange market hurt in recent months by a rate-fixing scandal, fund closures and near record-low volatility that’s sapped returns.
The outlook for rising U.S. rates contrasts with the extra monetary stimulus being rolled out by policy makers in Europe and Japan, a divergence that’s adding to dollar bulls’ optimism.
Ending its record bond-purchase program, the Fed said last week that borrowing costs could rise sooner than anticipated if it makes faster progress toward its goals of full employment and stable prices. The central bank has held its main rate in a range of zero to 0.25 percent since 2008.
‘Jittery’ Markets
“To the extent that someone just buys the dollar against everything, you’re basically betting on a U.S. recovery and Fed monetary tightening,” Eric Stein, who oversees about $13 billion at Boston-based Eaton Vance Corp., said by phone on Oct. 28. “The longer-term trend for me is very much intact. But given that markets are somewhat jittery, and sentiment- and positioning-driven, you’re going to have periods of consolidation.”Those interruptions in the dollar’s advance will become more, rather than less, likely, according to Alan Ruskin, the global head of Group of 10 foreign exchange at Deutsche Bank AG.
“The divergence story’s front and center of the bullish dollar,” Ruskin said by phone from New York on Oct. 30. “But it’s not something that you can trade 24 hours a day, every day of the week for every week of the month. This is something that’s going to ebb and flow.”
‘Risk Management’
The direction, though, is clear to strategists and speculators alike. The median of 40 analyst forecasts compiled by Bloomberg puts the U.S. currency about 4.2 percent higher at $1.20 per euro, and at 116 yen, by the end of next year.The greenback has already climbed almost 10 percent against the euro in 2014, with the shared currency falling to a more than two-year low of $1.2440 yesterday. The yen tumbled to a seven-year low of 114.22 per dollar yesterday after Japan surprised investors last week with changes to the nation’s pension fund and by extending its easing program.
The euro traded at $1.2504 and the yen at 113.62 per dollar as of 8:03 a.m. in London.
While the dollar trade “is more crowded than it was before,” the U.S. currency is still poised for a sustained advance, said Shahab Jalinoos, head of global foreign-exchange strategy at Credit Suisse Group AG in New York. The bank forecasts the dollar will trade at $1.20 per euro and 120 yen in 12 months.
“We still believe -- in the big picture, the long term -- in a resumption of dollar strength,” Jalinoos said in an Oct. 29 phone interview. “It’s just that now you have to be very careful around entry points and risk management.”
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