Hedge funds are close to calling it quits on the dollar’s best run in a generation.
Large speculators cut net bullish positions on the greenback to the lowest in almost two years last week. If they keep trimming at the current pace, those bets will be wiped out entirely by the end of the month. Currency options are signaling a less than one-in-four chance the greenback will extend its two-year, 25 percent surge against the euro in 2016, while against the yen the likelihood is less than one in 10.
As hedge funds abandon dollar wagers, investors and strategists have lowered their outlooks for the currency. The Bloomberg Dollar Spot Index slumped 3.9 percent in March, its biggest monthly drop since 2010, as Federal Reserve Chair Janet Yellen signaled the central bank would act “cautiously” as it looks to raise interest rates. Continued dollar weakness would be good news for U.S. companies that have seen their profit eroded the past two years by currency effects.
“We’re definitely near the end for the dollar bull run if we have not already seen the peak,” said Brendan Murphy, a Boston-based director at Standish Mellon Asset Management Co., which manages $16.5 billion. “We’re clearly in this topping-out process.”
Murphy said he’s selling the dollar against emerging-market currencies including the Mexican peso and Russian ruble.
Cutting Wagers
Analysts have reduced estimates for the dollar to the lowest in 16 months versus the Japanese currency and to the least since July against the euro. Hedge funds reduced net bullish positions on the U.S. currency versus eight major peers to 36,304 contracts as of April 5, the least since July 2014, from more than 420,000 contracts as recently as November, according to Commodity Futures Trading Commission data compiled by Bloomberg.
A Fed trade-weighted dollar index gained 19 percent during the past two years, approaching sustained rallies that began in 1979 and 1995. This year, the measure has fallen 5 percent. It may foretell a bigger correction lasting several quarters, according to UniCredit SpA.
“This is a key point, as the dollar could not sustain its gains even with a normal hiking cycle, let alone now with anticipation of an even more gradual one,” said Vasileios Gkionakis, global head of foreign-exchange strategy at UniCredit in London.
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