(Bloomberg) — Janet Yellen is turning from currency traders’ best friend to their biggest foe.
The most popular trade in the $5.3 trillion-a-day foreign-exchange market has been betting on a stronger dollar, leaving investors exposed when the Federal Reserve chair damped speculation last month of an imminent increase to interest rates. As the dollar slowed its advance, an index of currency returns snapped a record winning streak, prompting traders to reassess how much higher the greenback can go.
“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,” said Adam Cole, the global head of currency strategy at RBC Capital Markets in London. The dollar’s slowdown is “a major factor behind returns looking less positive,” he said.
While Bloomberg’s Dollar Spot Index climbed to a record on Tuesday, the measure is rising at the slowest pace since June and speculators including hedge funds are paring bets on how much the currency will strengthen. Yellen told Congress last week she won’t be locked into a timetable for boosting borrowing costs, just days after minutes of the Fed’s January meeting underlined the damage a stronger dollar can do to the economy.