Dollar bulls are growing concerned their pain is only just beginning.
The greenback weakened for a seventh straight day Thursday, the longest losing streak since April 2011, after Federal Reserve policy makers indicated they’re in no rush to raise interest rates amid slowing growth. The losses cap the U.S. currency’s first monthly decline since June.
The drop has surprised speculators who were the most bullish on the dollar in at least six years, leading investors to question the $5.3 trillion currency market’s biggest one-way trade. The divergence between a Fed that’s seeking to normalize rates, and the more than 20 central banks worldwide that cut borrowing costs this year, had made betting on the dollar seem almost a sure thing.
“The correction could go a long way, certainly much further than we’ve seen so far,” Robert Tipp, chief investment strategist for Prudential Financial Inc.’s fixed-income division in Newark, New Jersey, said by phone Wednesday. “You’ve seen a big swing in the sentiment,” said Tipp, whose company oversees $533 billion of bonds and currencies. Earlier this year he said the prospect of rising U.S. rates would support the dollar.
Speculative investors cut net bullish bets on the greenback to a six-month low of 324,940 contracts last week, according to Commodity Futures Trading Commission data.
The performance of foreign-exchange hedge funds has suffered during the decline. Parker Global Strategies LLC’s gauge of 14 top currency funds dropped 0.2 percent in April, its worst month since the dollar started climbing in the middle of last year.
“When you get to where sentiment is all one way in one trade, the trade gets very crowded,” Scott Smith, senior market analyst at Cambridge Global Payments, a global foreign-exchange and payments provider, said from Calgary Wednesday.
The Bloomberg Dollar Spot Index -- which tracks the greenback against 10 major peers including the euro, yen and pound -- extended its decline Thursday, a day after the Federal Open Market Committee published its statement and data showed the U.S. economy grew less in the first quarter than analysts forecast.
The index was at 1,165.37 as of 3 p.m. New York time, leaving it down 3 percent in April and headed for its biggest monthly loss in four years. It’s still up 16 percent since June.
While the FOMC called anemic first-quarter growth, in part, “transitory” in its statement, the absence of a stronger signal for higher rates prompted dollar bulls to begin to doubt their conviction.
“The FOMC statement is a reason to sell the dollar,” said Jonathan Lewis, a principal at New York-based Samson Capital Advisors LLC, which has $7.6 billion in assets. “The Fed wants a lower dollar” to promote exports and increase import prices, he said Wednesday.
The dollar has dropped 4.1 percent to $1.1192 per euro this month, halting a 28 percent rally in the nine months through March. Against Japan’s currency, it snapped a two-month advance to fall 1 percent in April to 118.91 yen.
The Fed “continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace,” the panel said in the Wednesday statement. The benchmark federal funds rate has been kept near zero since December 2008.
Paul Lambert, head of currencies at Insight Investment Management Ltd. in London, a Bank of New York Mellon Corp. unit, started to trim his bets on a stronger dollar in March because of lackluster U.S. economic data.
“We’re now looking to start to think about increasing back our dollar long position because we think that the consolidation is probably mostly behind us,” he said Monday.
While analysts still expect the dollar to gain this year, speculators are now more bullish on the yen relative to the currencies’ three-year average positioning, according to calculations by JPMorgan Chase & Co.
“Even though the U.S. dollar is poised to go higher as the Fed starts to move on interest rates and tighten monetary policy, the road upward isn’t going to be a smooth one,” said Smith at Cambridge Global Payments. “The rise in the U.S. dollar was a little bit too fast, too furious.”