Dollar Bulls Back Off Amid Concern Fed Will Delay Hike
Some of the biggest dollar bulls in the global bond fund sector have reversed course in recent weeks, cutting exposure to the greenback amid concern the U.S. Federal Reserve will delay a widely-anticipated interest rate hike.
The shift comes as the dollar's rally to 12-year highs shows signs of flagging, hurt by soft U.S. economic data and efforts by European central banks to stimulate their own economies, fund managers and analysts said.
Global bond fund managers pay close attention to countries' relative economic performance, while their own performance can turn sharply on central bank moves. The dollar has benefited so much from the disparity between U.S economic performance and much of the rest of the world's, that it's difficult to think it will be maintained, said Jack McIntyre of the $3.9 billion Legg Mason BW Global Opportunities Bond Fund.(GOBSX.O).
“The dollar has had an unprecedented move in such a short period of time,” said McIntyre, who said he cut his fund's exposure to the dollar to 37 percent, down from 43 percent in early March, by removing currency hedges. “The rate of the appreciation of the dollar has to slow. It's not sustainable. We've moved so far, so quickly.”
Global bond funds report, as a percentage of their total assets, their exposure or allocations to various currencies. For dollars, for instance, the figures would reflect fund holdings of U.S. corporate and government bonds, dollar-denominated bonds issued by foreign governments and corporations, and the effects of instruments like currency hedges.
Four of the 10 fund managers that Thomson Reuters' Lipper unit said posted the biggest increases in their dollar allocations in 2014 told Reuters they have since trimmed their positions. One increased his exposure, while the other five declined to comment.
One of the biggest dollar enthusiasts, the $398 million Prudential Global Total Return Fund (GTRAX.O), cut its dollar exposure to 54 percent of assets at the end of February, down from 58 percent at December 31, Prudential said.
“We're seeing the strong U.S. dollar as a headwind” on the U.S. economy, by making exports more expensive, said Michael Collins, manager of the fund. He said he felt the dollar market was also showing signs of becoming top heavy. “It's a crowded trade, and that always makes us a little nervous,” he said.
The fund's dollar exposure was just 27 percent at the end of 2013, Prudential said.
Other managers who cut exposure included Erik Weisman of the $647 million MFS Global Bond Fund (MGBAX.O) and Christopher Diaz of the $361 million Janus Global Bond Fund(JGBAX.O). Diaz said he cut some dollar exposure based on what he called “dovish” recent signals from the Fed that it could wait longer than expected to raise rates.
Higher rates could draw in foreign investment and further boost the dollar's value. Janus put the fund's dollar exposure at 57 percent at the end of February, down from 76 percent at the end of December.
The pattern matched a broader skepticism. Overall, fund managers are about evenly split on whether the dollar will strengthen, said Gregory Dowling, the head of research for Fund Evaluation Group. That is a change from several months ago when, he said, a majority expected the dollar to keep rising.
“People are starting to say, maybe it (the dollar) has come too far, too fast,” he said.
The dollar index .DXY, measuring the greenback's value against a basket of major currencies, closed Tuesday up 23 percent since June 30, helping returns in funds with higher dollar allocations. Yet the index has slid a bit off its mid-March highs and has been hurt by weak U.S. jobs data.
The manager among the group who sounded most optimistic about the dollar was Michael Kushma of the $245 million Morgan Stanley Global Fixed Income Opportunities Fund (DINAX.O). He said he has increased the fund's dollar exposure to about 99 percent currently from 97 percent at Dec. 31.
Kushma said positive U.S. employment trends and low energy prices still make a Fed rate increase by early next year likely while stimulative actions by foreign central banks will take a while to reach their economies.
“There's still not a lot of good news outside the U.S, and we think the bad news in the U.S. is temporary,” he said.