Is the Dollar Next? Investors Reassess After Swiss Franc Shock

After Switzerland shocked markets by scrapping its currency cap, investors are beginning to ask whether a policy surprise may be lurking for the dollar, too.

Samson Capital Advisors LLC said the Swiss move, which sent the franc surging as much as 41 percent against the euro last week, was “a good reminder” of the risks of following the herd, just as speculators pushed bets on a dollar rally to a new high. A shock from the Federal Reserve, such as raising interest rates less quickly than investors expect, may derail the greenback after it advanced to the highest in a decade, State Street Global Advisors Inc. warned.

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“People have to be re-assessing what their positions are,” Jonathan Lewis, chief investment officer at New York-based Samson, which has $ 7.4 billion in assets, said by phone on Jan. 16. In the case of Switzerland, “people were betting billions of dollars on the kindness of strangers, people they’d never met, whose names they couldn’t pronounce.”

Bloomberg’s Dollar Spot Index — which tracks the U.S. currency against the euro, yen and eight others — is headed for a seventh straight monthly advance on the assumption the Fed will raise its zero to 0.25 percent benchmark rate in coming months. At the same time, traders expect Europe and Japan to debase their currencies by flooding markets with more cash.

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Only now, after being shocked by the Swiss National Bank, some investors are asking: What if we’re wrong?

Rate Expectations

A small downturn in the U.S. economy, “just enough to make people say maybe rates aren’t moving higher, the Fed is on hold — that could take some of the sheen out of the dollar’s shine,” Greg Peters, a senior investment officer at Prudential Financial Inc.’s fixed-income business in Newark, New Jersey, said Jan. 15 by phone. His division oversees $ 534 billion of bonds.

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It’s the extent of the dollar positioning that’s causing angst.

Hedge funds and other large speculators pushed net wagers on the dollar strengthening versus eight major peers to a record 448,675 contracts in the week ending Jan. 13, according to the latest data from the Commodity Futures Trading Commission in Washington.

Anticipating Gains

Forecasts in Bloomberg surveys still see the U.S. currency gaining versus all but nine of its 31 most-traded peers by year-end, after climbing against all of them in 2014.

Bloomberg’s dollar index rose to 1,147.54 on Jan. 8, the highest closing price since it started at the end of 2004. Even so, a trade-weighted measure of the greenback versus the currencies of its major trading partners remains short of its peaks in 2009, suggesting the dollar rally has further to go.

This has helped convince investors to speculate on a stronger dollar and, some say, left them vulnerable to the whims of policy makers.

“If we do have outcomes, either from the Fed that are less hawkish, or outcomes from the European Central Bank that are less dovish than are expected, those two could conspire” to hurt the dollar against the euro, Collin Crownover, the Boston-based head of currency management at State Street, which oversees about $ 2.4 trillion, said by phone on Jan. 16.

That same day, the euro tumbled to an 11-year low of $ 1.1460 on speculation the ECB is preparing to announce currency-depreciating sovereign-bond purchases. Europe’s shared currency was at $ 1.1604 as of 8:38 a.m. in New York, having fallen 4.1 percent since the start of this year.

Fed ‘Patience’

There are already signs the U.S. central bank may be pulling back from a possible rate increase around midyear.

Fed officials urged “patience” on monetary policy at their December meeting, noting risks to the economy from lower oil prices and weak overseas growth. Futures contracts now show about a 50 percent chance the U.S. will raise rates to 0.5 percent or higher before October, while at the end of last year traders were betting on a September increase.

Bullish-dollar positioning may convey a sense of deja vu among investors.

Speculators boosted positions on the franc weakening against the dollar to the highest in 1 1/2 years this month, CFTC data show, only to be burned by a 21 percent jump to a more than three-year high on Jan. 15. The franc also posted an unprecedented 23 percent rally against the euro that day after Switzerland abandoned the cap that had been in place since 2011.

The Swiss announcement was all the more unexpected because, two days earlier, SNB Vice President Jean-Pierre Danthine re-affirmed the currency peg as a “pillar of our monetary policy.” Central-bank President Thomas Jordan’s insistence that surprise was necessary only sowed more doubt in the minds of investors about their other currency positions.

“Although Fed expectations continue to be shifted back in the markets, FX probably hasn’t really focused on that,” Derek Halpenny, the London-based head of European markets research at Bank of Tokyo-Mitsubishi UFJ, said by phone Jan. 15. “That could be a catalyst for some of the demand for dollars coming off.”

To contact the reporters on this story: Rachel Evans in New York at revans43@bloomberg.net; Lananh Nguyen in New York at lnguyen35@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Paul Armstrong, Kenneth Pringle

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