Foreign Exchange Market Bets on Stronger Dollar after Federal Chair Denies Speculations

It seems that Janet Yellen, an American economist, who is said to be currency traders' best friend, is turning to their biggest enemy.

The most-popular trade in the $5.3 trillion-a-day foreign-exchange market has been betting on a stronger dollar, leaving investors exposed, after the Federal Reserve chair denied speculations last month of an expected increase in interest rates.

Now as the dollar slowed its advance, an index of currency returns snapped record prompting traders to reassess how much higher the greenback can go.

Adam Cole, the global head of currency strategy at RBC Capital Markets in London, said, "Currency managers had been doing well because they've been long dollars, and the dollar had been pretty much on a straight-line trajectory higher. The dollar's slowdown is a major factor behind returns looking less positive".

On the other hand, Bloomberg's Dollar Spot Index climbed to a record on Tuesday. The measure has been rising at quite a low pace since June.

It was found that Yellen last week told Congress that she will not be locked into a timetable to boost the borrowing costs, days after minutes of the Fed's January meeting underlined the damage that a stronger dollar can do to the economy.

Parker Global Strategies LLC's gauge of 14 top currency funds fell 0.15 in February, ending seven months of gains.

Ian Stannard, Morgan Stanley's head of European currency strategy in London said that the resulting pause in the dollar accounts for some of the disappointment in the performance of foreign-exchange funds.

But he also said that the strong-dollar trend might stay in place and also predicted a gain of about 20% on a trade-weighted basic during the next three years.

Bloomberg's dollar index, which keeps a track of the greenback against 10 major peers including the euro, yen and pound, rose 0.45 in the previous month. Experts said that it was the smallest increase since it declined in June.