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Dollar Bulls Waver as Fed’s Signals Whipsaw Traders

Dollar Bulls Waver as Fed’s Signals Whipsaw Traders
The Dollar Index, which Intercontinental Exchange Inc. uses to monitor the greenback against the currencies of six major U.S. trade partners, fell as much as 1.9 percent on July 11, the most since October 2011. Photographer: Scott Eells/Bloomberg

Praxis Trading’s Yra Harris said he isn’t taking any chances when Federal Reserve Chairman Ben S. Bernanke delivers his semi-annual testimony on the economy and monetary policy to Congress the next two days.

Even with the dollar rising the most this year of 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes, it dropped on July 11 by the biggest amount since October 2011 after Bernanke said the U.S. economy still requires stimulus. Futures bets on the greenback rallying versus the yen, euro, Canadian dollar and British pound had moved in lockstep two weeks in a row as of July 9, the first time that’s happened since 2009, according to Commodity Futures Trading Commission data.

“I’m absolutely paring back positions because you have to respect the ability of one phrase to move the markets,” Harris, the chief trader and analyst at Praxis in Chicago, said yesterday in a telephone interview. “This market is favoring people who are nimble in trading. This market is not favoring people with long-term views.”

Hedge funds and other futures traders had $30.2 billion of wagers that the dollar would rally against the pound, yen and six other currencies as of July 9, up from $24 billion the previous week, according to CFTC data compiled by Nomura Holdings Inc. As recently as the end of last year, investors had $14.5 billion of bets that the currency would decline, or net short positions.

Taper Speculation

Bernanke said on July 10 in a question-answer session after a speech in Cambridge, Massachusetts, that inflation and unemployment rates show the U.S. economy still requires very accommodative monetary stimulus.

Traders have been anticipating the Fed will reduce its monthly bond purchases since Bernanke suggested June 19 that stronger growth could prompt a tapering of the debt-buying program, which is used to keep borrowing costs low.

The Fed has been buying $40 billion of mortgage bonds and $45 billion of Treasuries each month to inject cash into the economy. JPMorgan Chase & Co.’s Group of Seven Volatility Index, based on currency-option premiums, jumped to 11.8 percent on June 24, the highest close in a year. The benchmark was at 10.7 percent as of 1:12 p.m. in New York and has risen from a low for this year of 7.64 percent in January.

U.S. unemployment, at 7.6 percent, hasn’t been below 7 percent since November 2008. The consumer price index is forecast to end the year at 1.5 percent, from 2.1 percent in 2012, according to economists surveyed by Bloomberg. The Fed’s inflation target is 2 percent.

‘Enormous Value’

Last week’s losses and volatility show the risk of consensus trades and positioning, said Alan Ruskin, the global head of Group of 10 foreign-exchange strategy at Deutsche Bank AG. The Dollar Index, which Intercontinental Exchange Inc. uses to monitor the greenback against the currencies of six major U.S. trade partners, fell as much as 1.9 percent on July 11, the most since October 2011.

“What was significant was, for example, that all positions were aligned the same way,” Ruskin said July 15 in a telephone interview. “It tells you, the positioning, that if there’s a fundamental story or shock the other way, the market is vulnerable to a squeeze, that has enormous value in giving you that kind of information about the potential vulnerability to a piece of news.”

Emerging Powers

Emerging-market currencies from South Africa’s rand to Russia’s ruble rallied after Bernanke signaled that stimulus to the world’s largest economy won’t be dropped soon. The assets had risen as easing in the U.S. spurred investors around the world to seek higher-yielding assets.

An equally weighted basket of so-called BRICS emerging-market currencies has climbed 1.9 percent from a low this year on July 5 as investors that had been seeking higher yielding assets unwind their bets.

Former Goldman Sachs Asset Management Chairman Jim O’Neill coined the term BRIC in 2001 to describe Brazil, Russia, India and China -- the four emerging powers he estimated would equal the U.S. in joint economic output by 2020. Those nations invited South Africa to join their ranks in December 2010.

Investors were surprised last month by gains in the dollar when they perceived the Fed chairman as more hawkish than anticipated.

The Dollar Index rose on June 19 by the most since May as Bernanke said the central bank may start dialing back its asset-purchase program, known as quantitative easing, this year and end it entirely in mid-2014 if the economy achieves sustainable growth.

Policy Report

The gauge, at 82.614, is forecast to increase to 86.1 by the end of 2013, according to the median estimate of analysts and economists surveyed by Bloomberg. The gauge has risen 3.6 percent this year.

“People are still playing it from the sidelines,” Matthew Slade, a strategist at Nomura International Plc in London, said of the dollar in a phone interview yesterday. “Going into speeches, I think that’s how the traders like to play it because it’s very difficult to gauge what Bernanke is going to say.”

Bernanke is scheduled to deliver his semi-annual monetary policy report starting tomorrow at the House Financial Services Committee. Strategists surveyed by Bloomberg forecast the dollar will gain this year against the euro, yen, pound and franc. They’re estimating the U.S. currency will be about unchanged versus the Canadian, Australian and New Zealand dollars.

‘Dollar Uptrend’

“Following the excessive moves from last week, the market is no longer as long dollars,” Valentin Marinov, the London-based head of European Group of 10 currency strategy at Citigroup Inc., said yesterday in a telephone interview.

“Tapering will likely remain on the table, keeping long-term Treasury yields and the dollar generally supported,” he said. “Overall, the dollar uptrend remains very much unchanged. The U.S. growth story still remains the most compelling one in G-4. Investors will still want to be buying dollars on dips.”

The dollar has rallied 5.5 percent this year versus nine developed-nation counterparts tracked by Bloomberg Correlation-Weighted Indexes. The yen has fallen 9.1 percent, and the euro rose 5.1 percent.

“The risk of something being clarified when Bernanke speaks is certainly going to make some people be a little bit sidelined,” Fabian Eliasson, head of U.S. currency sales in New York at Mizuho Financial Group Inc., said yesterday in a phone interview. “People will be fairly neutral going into overnight.”

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