Currency manager returns were down 2.9% in May, taking their performance year-to-date to -1.7%, according to research firm BarclayHedge. May’s declines snapped three straight months of gains, including a 2.8% rise in April. Rival index firm Parker Blacktree measured year-to-date performance at -1.4%.
“The trend towards growth currencies and away from the dollar that was established in March reversed in spectacularly brutal fashion in the first few days of May, on the back of the commodity sell-off,” says Andrew Woolmer, a portfolio manager at SEB Wealth Management. “The move was then exacerbated by our old friend Greece coming back into play.”
As the euro moved from $1.4830, its highest level since December 2009, to as low as $1.4110 in seven days, currency managers were caught long the currency, and took a hit as the US Dollar Index powered 2.2% higher over the month.
Of 79 currency traders that provided data to BarclayHedge, the highest monthly return was 7.47% and the lowest was -12.64%. The median return was -1.22%.
“Continuing turmoil in the Middle East, tightening in China and eurozone concerns all contributed to a reversal of momentum in currency markets and drove the US Dollar Index higher,” says BarclayHedge president Sol Waksman.
The euro has recovered from its May lows and was recently trading at $1.4510. The potential for further gains may be contingent on the outlook for eurozone interest rates, relative to their US counterparts,
“The picture is unclear and there are a lot of crosswinds out there, such as the outlook for European sovereigns, but ultimately it will be interest-rate differentials that win out,” says Amit Tanna, senior portfolio manager with JPMorgan Asset Management. “On that basis, we might expect to see further dollar weakness.”
The European Central Bank lifted its key interest rates by 25 basis points in April to 1.25% and signalled it would continue its programme of policy “normalisation”. The US Federal Reserve, meanwhile, has remained wedded to ultra-low rates and liquidity operations as it attempts to kick-start growth in the world’s largest economy.
The relative attractiveness of the euro may be mitigated by continuing concerns over the outlook for Greece, analysts say, as policy-makers wrangle over the shape of a rescue package for the indebted country, ahead of a European heads of state summit on June 23 and 24.