Bloomberg News

End of Risk Rally to Benefit Dollar, FX Concepts’ Taylor Says

June 06, 2011

June 6 (Bloomberg) -- John Taylor, founder of the world’s largest currency-hedge fund, said he’ll buy the dollar as soon as the next few days because the rally in higher-yielding assets will come to an end amid sluggish U.S. economic growth.

The end of the Federal Reserve’s Treasury-buying program, known as quantitative easing, will hurt growth, Taylor said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. The absence of further stimulus will cause equities to decline in the second half of this year, he said.

“The markets are showing risk as being off,” Taylor said. “The cycle has turned because the government is going to cut back on fiscal stimulus, QE2 is ending, all of those things tell us that it’s over.”

The Standard & Poor’s 500 Index has risen 10 percent through last week since the Fed implemented its $600 billion asset purchase program in November. The Thomson Reuters/Jefferies CRB Index of commodities added 16 percent while the dollar fell 5.3 percent against the euro during the same period. The Fed’s program is often dubbed QE2 because it followed an earlier round of $1.7 trillion in bond purchases in 2009 and the first quarter of 2010.

Taylor, 67, is shorting the euro and buying the yen because of questions on how Europe will resolve its sovereign debt crisis. A short is a bet the price of an asset will fall. FX Concepts will begin betting the dollar will gain versus the euro, he said.

Risk Rally

Taylor, who manages about $8.5 billion and uses statistical models to help predict future movements in assets, said the so- called risk rally may end anywhere from a few days from now up to a few weeks.

The dollar weakened 0.9 percent last week as measured by the Bloomberg Correlation-Weighted Indexes. It fell 2.2 percent against the euro, according to data compiled by Bloomberg. The dollar rose 0.3 percent to $1.4597 per euro at 10:57 a.m. in New York trading.

FX Concepts, whose returns last year were the company’s best since 2006, reaped gains in the first half of 2010 betting on a slide in the euro against the dollar and then profited by its rise the rest of the year. At present, the fund is short the common currency, which means it will profit if it declines.

The unemployment rate in the U.S. climbed to the highest level this year in May, when it rose to 9.1 percent, the Labor Department reported last week.

The Institute for Supply Management’s factory index fell to the lowest level since September 2009 last month, the group announced June 1.

--Editors: Dave Liedtka, Dennis Fitzgerald

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Betty Liu in New York at bliu17@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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