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GATA chairman gets the microphone, and Russia reports record reserves
Sinking Dollar Rekindles Funds' Memory of a Year Ago
By Jamie McGeever
Reuters
Thursday, October 21, 2004
http://www.reuters.com/financeQuoteCompanyNewsArticle.jhtml?
duid=mtfh99621_2004-10-21_15-13-56_n21404175_newsml
NEW YORK -- Roused by this week's breakout from
the summer doldrums in currency markets, hedge
funds are drawing parallels with a similar breakdown
in the U.S. dollar around this time last year and are
again selling the greenback.
The dollar's decline in the last few days has broken it
out of trading ranges that held for several months, and
selling momentum is gathering pace.
To macro hedge funds, which base trading strategies
on longer-term price trends and momentum, and which
struggled to make money in the past few months of
low volatility, this may be a trend they can't afford to
miss.
"Most of the macro players have done poorly this year
but one thing that can drag them back in is price
action," said the senior trading strategist at a large
Wall Street bank in New York.
"A lot of the big macro funds have been coming in
putting on short dollar positions," said Neil MacKinnon,
chief economist at the ECU Group, a London-based
currency management firm.
On Thursday, the dollar tumbled across the board, to
new multi-month lows against its major rivals. The
euro traded as high as $1.2651, a level not seen since
late February.
The renewed downtrend is seen as a reaction to a
series of weaker U.S. economic indicators in recent
weeks and concerns that record high crude oil prices
could slow economic growth.
The latest trade and capital flows data also suggest
the U.S. could have trouble financing its record
current account and fiscal deficits, as noted by several
Federal Reserve officials have also refered to in recent
speeches.
The bluntest comment came on October 7, when
Dallas Fed President Robert McTeer said: "Over time,
there's only one direction for the dollar to go --
lower."
Such concerns were also behind the dollar's steep
decline late last year that saw the euro surge to an
all-time high of $1.2927 in February and prompted
unprecedented yen-selling intervention from Japanese
monetary authorities.
Many analysts point to late November last year,
when the euro was trading around $1.1850, as the
point when hedge funds really increased their
positions and drove the euro higher.
The U.S. economy is now stronger than last year,
though, the Federal Reserve has begun raising
interest rates, there is a U.S. presidential election
in two weeks, and the euro is almost 10 cents more
expensive, analysts noted.
Nevertheless, "there's a growing consensus that the
smart money wants to be short dollars," said Michael
Woolfolk, senior currency strategist at Bank of New
York in New York. "It's a directional trend that's
developing momentum the longer it goes on."
While the dollar is weakening across the board, the
euro appears to be the main vehicle to play the move.
That's because it's the most liquid currency in the
world after the dollar, which means it's easier to get
in and out of the market.
Unlike last year, so far the euro's rise isn't eliciting
howls of complaint from euro-zone officials worried
about the threat to the region's competitiveness in
export markets.
The anti-inflationary impact of the stronger euro may
be helping to offset potential inflation from rising crude
oil prices, analysts noted.
Already this week, finance ministers from Luxembourg,
Austria, and Ireland have said they're not worried by the
euro's current appreciation.
The euro's climb into a higher range has convinced
UBS and BNP Paribas that the move is for real, and
both aggressively raised their year-end euro forecasts
on Wednesday.
UBS now sees the euro at $1.29 at the end of the year
compared with its previous forecast of $1.25, while BNP
Paribas now sees the unit at $1.28, up from $1.16.
However, there are reasons for hedge funds to be
skeptical, as a consensus on market direction often
means a trend is already nearing an end.
"I think we're all coming in (selling dollars) ... but I
wouldn't play it (euro/dollar) because so many people
are in the same boat," said Jes Black, partner and
manager of Black Flag Capital Partners, a New
Jersey-based hedge fund.
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