Hedge funds increase bets dollar will decline

Date: Monday, May 2, 2011
Author: Rupert Neate, The Telegraph

Hedge funds increased their bets against the dollar to a massive $28.6bn (£17.1bn) in advance of Ben Bernanke's historic first press conference as chairman of the Federal Reserve last week.

The sum held in short positions against the world's reserve currency on April 26 is the highest in more than month and $3bn more than the previous week.

The figures, released over the weekend by the Commodity Futures Trading Company (CFTC), indicate that hedge funds have made hundreds of millions of dollars from the recent collapse in the value of the greenback.

The dollar hit a three-year low against a basket of currencies on Friday, and has fallen for the last five months straight. It fell 3.8pc against the basket in April, and is down 7.5pc down so far this year.

The data shows that investors are pulling out of the dollar in favour of almost every other currency except the Japanese yen.

Camilla Sutton, chief currency strategist at Scotia Capital, said: "It's an ongoing build of short-dollar positions overall. Generally, sentiment remains very negative against the dollar."

Hedge funds which use computer programmes to track trends are understood to have been the biggest winners from the dollar's slide.

Analysts at Credit Suisse said hedge funds which use "momentum" foreign exchange strategies, which follow trends until computer models tell them to stop, are up 10pc so far this year. In comparison funds following so-called macroeconomic strategies rose 1.5pc in the first-quarter, according to Hedge Fund Research.

Douglas Borthwick, managing director of Faros Trading, a foreign exchange trader, said dumping dollars was a "one-way bet with very little pullback".

The CFTC data shows traders and speculators are piling into the euro and the pound. More than $12bn was placed on bets that the euro would strengthen, a 12pc increase on the previous week.

Long positions worth $3.5bn were put on the pound, a 13pc increase on the previous week.

The dollar has fallen over fears that the Federal Reserve's policy of quantitative easing is undermining the greenback's value. The dollar fell further after Mr Bernanke's historic address on Wednesday when he confirmed the US would keep interest rates low and reaffirmed his commitment to buying back $600bn of Government bonds in a programme designed to pump cash into the US economy.

Mr Bernanke acknowledged inflation fears, but said interest rates were unlikely to change in the next few months.

Alongside the press conference, the Federal Reserve cut its growth forecasts for this year to between 3.1pc and 3.3pc, down from January's projection of between 3.4pc and 3.9pc. New data showed US gross domestic product (GDP) grew 1.8pc year on year in the first quarter of 2011, down from the 3.1pc growth seen in the final quarter of 2010.

Analysts had been expecting growth to hold up better, at 2pc. Sentiment over the US economy was also rattled last month when Standard & Poor's downgraded its credit rating outlook to negative from stable on concerns over America's "very large budget deficits".