Foreign-exchange traders just can’t seem to figure out the dollar -- and it’s costing them lots of money.
An index tracking returns of 14 top currency funds just posted its first back-to-back monthly decline in more than a year. Parker Global Strategies LLC’s measure fell 1.1 percent last month after dropping 0.7 percent in April.
Analysts attributed April’s poor results to managers being caught off guard by the greenback’s slide as the economy unexpectedly slowed. They say many were just as confounded by the currency’s rebound last month as Federal Reserve policy makers signaled their intent to still raise interest rates this year.
“Currency managers underperformed in April coming into May, but the real underperformance was that dollar bulls were throwing in the towel,” said Paresh Upadhyaya, director of currencies strategy at Pioneer Investment Inc. in Boston. He sees the dollar rising 9 percent to parity with the euro this year. “Market positioning isn’t there to capitalize on a bull market.”
Speculators cut net wagers on a stronger dollar to the least since September just as the currency jumped to a 12-year high against the yen and rebounded versus the euro. The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, jumped 2.3 percent in May following a 3 percent tumble in April that was the worst since 2011.
Investors have been slow to react to the shifting sentiment in the $5.3 trillion-a-day foreign-exchange market as the disappointing U.S. economic data of the first four months of the year began to improve in recent weeks. It didn’t help that Fed officials reaffirmed their intent to raise rates this year, giving the dollar a further boost as policy makers in Japan and the euro zone stick with policies that debase their currencies.
The dollar jumped to 124.68 yen on Monday, the strongest level since 2002, and has rallied almost 5 percent since slumping to a three-month low versus the euro in mid-May. It traded at $1.0911 per euro as of 11:56 a.m. in New York.
“The extent of the correction we saw” in the dollar until the middle of last month “caught people out,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London. Now, “the dollar is back on course to resume its longer-term bullish trend.”
The losses of the last two months have left the Parker index up just 0.2 percent for the year. That compares with a jump of 2.9 percent in all of 2014 that was the biggest since the 4.7 percent surge in 2008.
Hedge funds and other large speculators have cut bets on a stronger dollar since March, and the number of so-called net longs reached 275,021 contracts in the week through May 26, down from a record 448,675 in January.
The divergence in monetary policies will continue to underpin dollar gains, though investors aren’t well-positioned to exploit any rally, according to Neil Jones of Mizuho Bank Ltd., who predicts the U.S. currency will climb to parity with the euro this year.
“People’s positioning is reduced somewhat in terms of long-dollar,” said Jones, the bank’s head of hedge-fund sales in London. “There’s room for dollar improvement, only this time around the market doesn’t necessarily have the positions it did.”