Hedge Funds Seek the Next Big Shorts After Dollar Rally Fizzles

Hedge funds are scouring for the right currencies to bet against as the opportunities to profit from wagering on the dollar’s strength ebb, according to a money manager, which invests in the funds.

Managers expect the greenback’s gains to be less pronounced following its rally in the last three quarters, said Sam Diedrich, a director at Pacific Alternative Asset Management Co., which oversees about $9.5 billion in hedge-fund investments. What was once the most popular trade in the foreign-exchange market has fallen out of favor as a gauge of the dollar declined 2.5 percent this quarter, following a 20 percent rally in the nine months ended March 31.

“The gains will be made more on the other side of the currency,” Diedrich said in an interview by phone from Irvine, California. “It won’t be a story about the dollar; it will be a story about the idiosyncratic weakness in a particular currency pair.”

Forecasters see the dollar climbing about 7 percent versus the euro and about 3 percent against the yen by Dec. 31, compared with a 14 percent advance against each last year. They are most bearish on the Argentine peso, Russian ruble and Brazilian real among 31 major currencies, predicting declines of as much as 17 percent against the dollar, according to estimates compiled by Bloomberg.

After the Washout

There hasn’t been a strong consensus among hedge funds on which currencies they want to bet against, Diedrich said.

“There hasn’t been a clear trend that’s been established on the back of this washout because it’s still going on a little bit,” he said.

Hedge funds and other large speculators trimmed bets on dollar gains for a seventh straight week in the period through May 12, according to the latest data from the Commodity Futures Trading Commission in Washington. The wagers have dropped by about a third since the end of March.

Managers have pushed back expectations for a U.S. interest rate hike to September, at the earliest, amid lackluster economic data, Diedrich said. Federal Reserve officials signaled they are unlikely to raise borrowing costs in June, while leaving open the option of tightening later in the year, according to minutes of their April meeting released on Wednesday in Washington.

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 major trading partners, has gained 1.9 percent since reaching a four-month low on May 15. The gauge reached a decade-high on March 13.

“The U.S. dollar will remain well bid and stable and continue to appreciate, but not at the same pace,” Diedrich said. “The performance gain in FX going forward will be less about going long dollar and more about which currencies you’re long the dollar against.”