UBS Group AG’s wealthiest clients are still buying dollars even as the most popular trade in the foreign-exchange market has fallen out of favor, according to the world’s largest private bank.
UBS expects the Federal Reserve’s first interest-rate increase since 2006 to come in September after policy makers played down the significance of the economy’s slowdown in the first quarter, said Simon Smiles, chief investment officer for ultra-high-net-worth individuals in Zurich. The Fed’s decision would contrast with at least two dozen of its peers having eased monetary policy this year, led by the European Central Bank’s introduction of quantitative easing.
A gauge of the dollar has slumped 2.9 percent in April, halting a nine-month rally that propelled it to a record. At the end of its two-day meeting on Wednesday, the Fed provided little insight on when it plans to raise borrowing costs after U.S. gross domestic product barely grew in the first quarter.
“There is still a lot of love for the dollar amongst the clients I speak to,” Smiles wrote in an e-mail interview Wednesday. “We are not changing our tactical overweight on the dollar despite the weak U.S. GDP data.”
UBS is advising clients to hold higher weightings in the dollar than recommended by the benchmark indexes they follow as the greenback is likely to strengthen to $1.02 versus the euro in the next three months, Smiles said. The dollar rose 0.1 percent to $1.114 per euro as of 8:01 a.m. in London.
Some UBS clients who believe further dollar gains will be limited are seeking to enhance returns by putting their money into hedge funds, currency-hedged investments or selling call options on the euro versus the dollar, Smiles said.
UBS ranked first in assets under management in a survey of the world’s private banks published last year by Scorpio Partnership, a London-based consultancy.
Hedge funds and money managers cut bets to the least since October that the dollar will strengthen, according to the Commodity Futures Trading Commission. Net futures positions betting on a stronger greenback against eight major counterparts dropped to 324,940 contracts last week.
The Fed’s Open Market Committee kept its benchmark interest rate near zero on Wednesday saying weakness that saw the economy almost grind to a halt in the first quarter was partly due to “transitory factors.”
BlackRock Inc., the world’s biggest money manager, said the Fed will probably raise borrowing costs in September.
“The economy is likely to bounce back in the second and third quarters, and it would be both disheartening and potentially destabilizing if the FOMC were to squander this window of opportunity to make an initial rate move,” Rick Rieder, the chief investment officer of fundamental fixed income at BlackRock in New York, wrote in an e-mailed statement.
The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 major peers, rose 0.1 percent on Thursday, halting six days of declines which was the longest losing streak since August 2013.
“Uncertainty around the Fed -- whether they move, when they move -- will weigh on the dollar,” said Nudgem Richyal, a Singapore-based senior fund manager at JO Hambro Capital Management, which manages more than $20 billion. “When you look around the world, which other currencies can really take up the baton of strengthening? It’s difficult to see.”