Decoding Dollar Turns Into Wall Street’s Parlor Game: Currencies

The only consensus on the dollar is that there’s no consensus.

Strategists have offered explanations for unexpected U.S. currency depreciation ranging from pressure to sell the greenback to buy higher-yielding currencies in carry trades, to flows linked to growth in China’s reserves, to selling by computers using algorithmic-trading systems. What’s certain is the dollar, a top bullish currency bet at the end of 2013, has fallen to its lowest level since September 2012, and large speculators have given up on it, data from the Commodity Futures Trading Commission show.

Amid the mystery of the weak greenback, foreign-exchange analysts are sticking with projections for it to climb against its major counterparts as the U.S. economy expands and the Federal Reserve reduces its stimulus measures. Forecasters predict a rally against a basket of peers in each of the next four quarters, and gains of about 11 percent by the end of 2015, according to the median estimate in a Bloomberg News survey.

“It’s not entirely clear why the dollar has been underperforming, particularly when you stack the U.S. up against countries or economic areas like the euro zone,” Robert Lynch, a currency strategist at HSBC Holdings Plc in New York, said yesterday in a phone interview. Some investors “thought the approach of the end of quantitative easing, and the expectation of the eventual turn in the Fed’s interest-rate policy would be dollar supportive generally, and it hasn’t panned out that way.”

Dollar Down

The dollar has fallen 0.1 percent this year against the 18-nation euro, including a 2.3 percent drop in February. The U.S. currency has lost 3.4 percent versus the yen, paced by a 3.1 percent January decline.

At the start of the year, the dollar was projected to rally to $1.32 per euro by the end of March, according to Bloomberg surveys of analysts. It was forecast to rise to 104 yen by the end of the first quarter, a separate survey shows. The U.S. legal tender traded at $1.3762 per euro and 101.76 yen at 12:22 p.m. in New York.

Hedge funds and leveraged investors have capitulated. After reaching a bullish peak in January, net futures positions betting on gains in the dollar versus eight major currencies have been liquidated, reaching a net bearish position on April 8, according to CFTC data compiled by Bloomberg.

Net bearish dollar positions stood at 61,828 contracts as of April 29, compared with a 2014 peak net bullish position of 241,987 contracts on Jan. 21.

Reserve Currency

The dollar, the world’s premier reserve currency, fell last week even as U.S. employment gains exceeded forecasts and tensions between Russia and Ukraine intensified. The Labor Department said May 2 that employment climbed 288,000 in April, the most since January 2012.

“When a safe-haven rally in Treasury yields led to the dollar actually selling off, not rallying, that’s really, really strange,” Eric Stein, a portfolio manager at Eaton Vance Corp. in Boston, said May 7 in a telephone interview. “That doesn’t make fundamental sense.” Stein oversees about $13 billion.

Fed Chair Janet Yellen and her colleagues have reduced monthly bond-buying to $45 billion a month, which should be beneficial to the dollar because the central bank is printing fewer of them. This week, she declined to give a timetable for raising the benchmark rate, which has been close to zero since December 2008.

“We’re not giving up on the notion that the eventual end of tapering and the end of QE, which at the current pace will end in October, will eventually provide some greater degree of support to the U.S. dollar,” HSBC’s Lynch said.

Market Measure

The U.S. Dollar Index, which InterContinentalExchange Inc. uses to track the currency against a basket of six major trading partners, has fallen 0.2 percent this year to 79.844. The measure was forecast at the end of 2013 to rally to 82.9 by mid-year, according to the median of a Bloomberg survey. Analysts have since revised their estimates to 80.7.

Among the dollar-weakness theories is China’s purchases of Treasuries. The country’s buying of U.S. assets drove down bond yields, making the currency attractive for borrowing in dollars and investing in higher yielding securities, known as the carry trade, according to Hans Redeker, head of global currency strategy at Morgan Stanley in London.

The People’s Bank of China’s dollar purchases, used to check the yuan’s appreciation, contributed to a $128.7 billion increase in the nation’s foreign-exchange reserves in the first quarter to a record $3.95 trillion.

China Account

“With China’s currency reserves growing strongly, you had a reason why bond yields were trading lower,” Redeker said yesterday in a phone interview. “That decline in bond yields was the reason why the U.S. dollar came under selling pressure.”

Yellen said yesterday in congressional testimony that Treasury yields aren’t likely to rise in the absence of a more robust economic recovery.

“You can’t fight the Fed unless you have something really concrete,” Steven Englander, managing director and Global Head of Group of 10 FX Strategy at Citigroup Inc. in New York, said yesterday in a telephone interview. “So far, there’s been nothing concrete.”

(An earlier version of this story corrected the date of positioning data in eighth paragraph.)

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