Dollar tumbles amid hedge fund talk

The dollar took a hit on Friday amid talk that a large hedge fund was forced to cut its trading positions betting on a rise in the US currency.

Market rumours suggested that the fund was having to cash in on profitable bets on the dollar to cover losses incurred on the oil market.

The fund was believed to have placed large wagers that oil prices would rise, and was caught off guard as oil prices slid to their lowest level in a year on Friday.

Before Friday’s dramatic action, the dollar was benefiting from the slide in oil prices as traders bet that it would boost economic activity in the world’s largest economy.

The dollar fell 0.2 per cent against the euro to $1.2830 on Friday, 0.4 per cent against the yen to Y117.70 and 0.3 per cent to $1.8940 against sterling.

However, over the week, the dollar put in a remarkably resilient performance in the face of a string of soft US economic data releases, rising 0.2 per cent against the euro, 0.2 per cent against the yen and 0.9 per cent against sterling.

Both US consumer and producer price inflation figures for October came in weaker than expected, while retail sales data also missed forecasts.

“Despite all the bad news that has been thrown at the dollar, it’s quite clear it’s not ready to fall on its back just yet,” said Neil Mellor, strategist at Bank of New York. “It is still deriving a lot of support from its yield advantages.”

Indeed, analysts said the release of the minutes from October’s meeting of the Federal Open Market Committee, released on Wednesday, had helped support the dollar, as the US central bank maintained its hawkish stance on US interest rates.

Weakness in other currencies also conspired to support the dollar.

The yen came under pressure as the Bank of Japan left interest rates on hold at 0.25 per cent after is monthly policy meeting.

Meanwhile, the euro was hit by fears of increasing political interference in eurozone exchange rate policy as Dominique de Villepin, French prime minister, expressed concerns that the strong euro was damaging European exports.

Sterling took a tumble, falling to a six-week low against the euro as investors pared expectations of another rise in UK interest rates after the Bank of England released a dovish quarterly inflation report. The pound fell 0.7 per cent against the euro on the week.

The Swiss franc also came under pressure, dropping 0.4 per cent to six-year low against the euro and 0.3 per cent against the dollar after Jean-Pierre Roth, chairman of the Swiss National Bank, acknowledged that the introduction of the euro and the disappearance of weaker European national currencies had reduced the safe haven bonus for holding the Swiss franc.

Finally, investors sold commodity-linked currencies as energy and metals prices dropped. Over the week, the Canadian dollar fell 1.1 per cent against the dollar, the Norwegian krone slipped 1.2 per cent and the South African rand fell 1.1 per cent.