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Hedge Funds at Risk as Fed Dollar Focus Threatens Bull Bets 

September 20, 2016

Liz McCormick, Bloomberg

Dollar bulls beware: The greenback is very much on the Federal Reserve’s radar. While the currency has dropped against the euro and yen in 2016, it’s barely declined judging by the Fed’s broadest measure of the dollar versus U.S. trading partners. By that index, it’s up 20 percent since the start of 2014. Governor Lael Brainard, in the last comments before the quiet period leading up to Wednesday’s policy decision, said the greenback’s rally may be having the same economic impact as raising the federal funds rate by about two percentage points.

For traders in the $5.1 trillion-a-day currency market, the challenge is to determine whether the dollar is too strong for policy makers to tighten again following liftoff from near zero in December. Hedge funds and other speculators are among those with the most at risk. They’ve been betting on dollar gains since May, and those wagers, amounting to about $8 billion, may falter if officials forgo tightening this year out of concern a dollar rebound would undermine the world’s largest economy.

“The exchange rate has no doubt taken a more important role in monetary policy,” said Paresh Upadhyaya, director of currency strategy in Boston at Pioneer Investments, which oversees about $236 billion. “It has made me very cautious on a much stronger U.S. dollar rally.” Read more

 
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