Pain Trade Surfaces in Currency Market as Dollar Bulls Whimper

  • Greenback posts 2.2% loss in two days, erasing 2016 rally
  • `The mother of all trades' breaks down, OppenheimerFunds says

It’s one of the very few trades that was making money for currency investors, a strategy that was backed by superior economic growth, forecasts for rising interest rates and even the indisputable advantage of being the asset of last resort.

If market moves this week so far was a guide, the strong-dollar trade doesn’t work anymore.

The two-day plunge in the U.S. currency is the most since March 2009, when the Federal Reserve announced it planned to buy Treasuries to rescue an economy struggling to recover from the financial crisis. Seven years on, and barely a month and a half after the Fed’s first baby step into the tightening cycle, dollar bulls capitulated as evidence piled up that the world’s biggest economy won’t escape slowdowns from China to Canada and Brazil.

"King dollar was looking toppish -- momentum has been built behind the move lower," said Mazen Issa, senior foreign-exchange strategist at Toronto-Dominion Bank in New York. "Foreign exchange markets are re-calibrating to rates and coming to the realization that a Fed hike as soon as March looks unlikely."

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 global peers, fell 0.5 percent to 1,221.02 as of 5 p.m. New York time, erasing its gain in 2016. The dollar declined 0.9 percent to $1.1209 versus the euro, reaching the weakest level since October.

Big Buys

Buying the dollar was the winning trade for the past two years as aggressive quantitative easing in Europe and Japan, and a China-led slowdown in emerging markets, weakened rival currencies. The dollar gauge rallied 22 percent since mid-2014 and reached the strongest since at least 2004 toward the end of January.

That changed as traders in federal funds futures show the Fed may stand pat this year, as opposed to the four increases policy makers forecast in December.

"The dollar was the mother of all trades," said Alessio de Longis, a New York-based money manager in OppenheimerFunds Inc.’s global multi-asset group, which manages $5 billion. “There has been one wholly consensus trade, which was the long dollar trade, so unfortunately you get these very nasty corrections," he said, referring to bullish dollar bets.

The U.S. January employment report on Friday may determine whether the dollar selloff will continue. The payrolls data will show the U.S. created fewer than 200,000 jobs for the first time since September, according to economists surveyed by Bloomberg.

“Every single negative indicator is chipping away at the possibility of a rate hike," said Alfonso Esparza, a senior currency analyst at Oanda Corp. in Toronto."The dollar has pretty much priced in that there won’t be a change in March."

A report Wednesday showed U.S. service industries expanded in January at the slowest pace since 2014. A strong dollar has hurt the export and industrial sectors and now there’s growing evidence the persistent weakness in manufacturing is starting to creep into the rest of the economy.

Dollar bulls have pointed out that "manufacturing is suffering, but the service sector is holding up and the service sector is 80 percent of the economy -- well, no longer," said Lee Ferridge, the Boston-based head of macro strategy for North America at State Street Global Markets. "The idea that you can just put your money in dollars and you’re going to be fine has taken a blow."

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