TheStar
NEW YORK: Foreign exchange funds suffered the biggest losses in two years in August as wider currency swings prompted investors to exit bets on the decline of the yen, according to Parker FX Index.
Funds focusing on forex fell 1.54%, the biggest decline since August 2005, according to Parker Global Strategies LLC, which compiles the index that tracks 79 companies in the United States, Canada and the United Kingdom. It followed a 0.58% drop in July, which was the first since February.
The yen appreciated 2.4% against the US dollar and rose 2.78% against the euro in August as the collapse of the US subprime mortgage market prompted investors to dump riskier assets financed through so-called carry-trades. In the transactions, investors borrow in Japan, where interest rates are the lowest among developed nations, to buy higher yielding assets in other countries.
“As carry-trades unwound and the yen appreciated, many investors who were short on the yen got hit hard,'' said Justin Snyder, an analyst at Stamford, Connecticut-based Parker.
The Japanese currency strengthened to 111.61 per dollar on Aug 17, the most since June 2006. It traded at 115.72 per dollar at 5:13pm in New York. It traded at 163.82 per euro.
Japan's key borrowing rate is 0.5%, compared with 4% in the 13-nation euro zone. The US Federal Reserve cut its key borrowing costs by a half percentage point to 4.75% last month.
Forty-four of the 79 funds reported losses. Those suffering the biggest losses dropped 16.9% in August, according to Parker.
Systematic funds, which tend to trade based on computer models, lost 2.27% during the month. So-called discretionary traders, which usually make decisions based on economic fundamentals, gained 0.25%.
“Models got overwhelmed with a spike in volatility,'' Snyder said.
Volatility among the seven most traded currencies, such as dollar, euro and yen, jumped 23.7% in August, the biggest advance since December 1996, according to JPMorgan Volatility Index.
KMJ Capital, based in Crystal Lake, Illinois, posted the biggest jump, gaining 14.07%. The ECU Managed Currency Program in London rose 8.95%, Parker said. – Bloomberg
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