By Gregory Zuckerman, Laurence Fletcher and Chiara Albanese
A surging dollar is pummeling currencies around the globe amid
efforts to boost economic growth, prompting a wave of investor bets
to profit from the upheaval.
Many global central banks are weakening their currencies as they
try to counter signs of economic gloom, signaled by falling
commodity prices, declining inflation and softening growth
expectations.
Those shifts, together with moves such as this month's surprise
decision by the Swiss National Bank to abandon its three-year-old
policy of limiting gains in the Swiss franc against the euro, have
fed a jump in the price swings of currencies. These dynamics are
tempting investors to make large bets on currency moves,
potentially fueling further exchange-rate shifts.
Denmark's central bank cut its deposit rate for the third time
in two weeks on Thursday, charging banks more to hold their money,
as it sought to defend its long-established currency peg against a
weakening euro, which has tumbled since last week when the European
Central Bank adopted a EUR1 trillion-plus ($1.129 trillion)
stimulus package.
On Thursday, the dollar climbed to an 11-year high against a
basket of currencies and is up 15% in the past year.
The Turkish lira slumped to a low against the dollar amid signs
the Turkish central bank may convene an unscheduled meeting to cut
interest rates, as government pressure intensifies to boost
sluggish economic growth.
The bank isn't scheduled to make its next monetary-policy
decision until Feb. 24.
An unscheduled meeting, if called, could end in "the first
preannounced emergency rate cut in my memory," said Viktor Szabo,
senior investment manager at Aberdeen Asset Management in
London.
Nations cutting interest rates or engaging in stimulus measures
hope to boost domestic economic growth and employment by weakening
their currencies, making exported goods more competitive overseas.
At the same time, currency depreciation also raises the risk of a
tit-for-tat race to the bottom, as trading partners seek to outdo
one another, only to find gains are limited.
Some big investors are anticipating currency moves.
Guggenheim Partners LLC, which manages $220 billion, is about to
start betting against the currency of the United Arab Emirates, the
dirham, said Scott Minerd, chairman of investments and global chief
investment officer at the firm. Guggenheim also is considering
betting against the Saudi Arabian riyal and on an appreciating
Danish krone, he said.
The currencies don't float freely, meaning that officials in
each country peg the currency's value to another currency such as
the dollar or euro. Therefore, those bearish bets depend on policy
makers changing course. The central banks of these countries
haven't given any indication they are considering removing the
pegs, and some economists and investors doubt they ever will.
Still, Guggenheim believes the trades, which use options to
place their bets, could be a home run rarely seen since the days of
the financial crisis. Guggenheim could score more than $1.5 billion
of profit if the trades work out, while its potential losses are
capped at about $30 million, Mr. Minerd saIid.
"The upside is more than 20 to 50 times the initial investment,"
based on 12-month options the firm will purchase, assuming the
U.A.E. devalues its currency, Mr. Minerd said.
The wagers reflect broad changes in financial markets over the
past six months, including the plunge in global crude-oil prices
that has hammered the economies of producers like the U.A.E. and
Saudi Arabia, along with tumbling government-bond yields in many
developed countries and last week's ECB move.
Investors are pouring funds into the U.S. in anticipation that a
gathering recovery will enable the Federal Reserve to raise
short-term interest rates for the first time since 2006.
On Thursday, the WSJ Dollar Index, which gauges the dollar
against a basket of currencies, hit its highest level since
September 2003, a day after the Fed offered an upbeat assessment of
the U.S. outlook and signaled it would be patient in raising rates.
The Fed signaled that it doesn't expect to start raising rates
until June at the earliest.
Besides Guggenheim, a number of other large investors, including
$5 billion hedge-fund firm Solus Alternative Asset Management LP,
have been betting against the Saudi Arabian currency, according to
an investor in the firm's funds. A representative of Solus declined
to comment.
Not every hedge-fund manager is convinced betting against
oil-dependent currencies is a wise move. Asked in an email whether
Saudi Arabia would consider breaking its peg, John Burbank, who
runs $4 billion hedge fund Passport Capital LLC and has spent years
investing in stocks in Saudi Arabia, answered: "No way...Stupid
trade, I would take the other side."
The trade has only a roughly 10% chance of succeeding, Mr.
Minerd and other traders placing this bearish wager said. But the
downside is capped, they said, because the currency options and
other trading means used are relatively inexpensive, a reflection
of how most investors view a devaluation of the currency as
unlikely.
In recent days, speculation has turned to whether Denmark's
krone offers the next big opportunity. The peg, which keeps the
exchange rate within a defined range, has come under pressure as
the ECB's stimulus plan weighs on the euro. The euro has fallen
6.4% against the dollar this year.
Since the Swiss National Bank ended its cap on the franc against
the euro in January, the cost for investors to insure against
volatility in the Danish krone has spiked, suggesting more traders
are anticipating a move.
Denmark's peg is a long-standing element of the country's policy
and is used to keep inflation low and conditions stable for
exporters. Unlike the Swiss National Bank floor on the euro, the
Danish peg also has the support of the ECB, which will defend it,
if necessary, under the terms of a European Union agreement.
"The peg is a cornerstone of Danish economic policy and has been
so since 1982, and there is a very broad commitment throughout
Denmark for the fixed exchange rate," said a central bank
spokesman. The Danish krone was little changed against the euro on
Thursday.
Some aren't sure the krone would rise if the peg ended, adding
another challenge to investors and underscoring the confusion of
many trying to negotiate the upheaval in financial markets.
Yeliz Candemir and Charles Duxbury contributed to this
article.
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com,
Laurence Fletcher at laurence.fletcher@wsj.com and Chiara Albanese
at chiara.albanese@wsj.com
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