LONDON businessman Nicholas Gentilli has noticed the pound’s surge up to more than $1.80 against the US currency in recent weeks, and is intrigued by it.
“My experience is of the exchange rate in the $1.40s, not the $1.80s,” he says.
“There is a temptation to buy some dollars now and wait a year in the hope that the pound falls 15% to where it feels as though the rate ought to be.”
Whereas Gentilli is considering a medium-term punt on the dollar, shorter-term British investors are already heavily committed – mainly on the opposite side.
Private punters are famous for getting their timing wrong but, on this occasion, most of them have been right. As the US currency’s decline accelerated, from $1.18 against the euro and $1.70 against the pound in late November, to $1.275 and $1.82 yesterday, they have gone with the trend.
Paul Hare, senior dealer at bookmaker City Index, says: ” People have made absolute cartloads.
“They have been short of the dollar and, because the market has hardly hesitated at all in its slide, they have never been stopped out.”
Hare says two of his firm’s clients – both retired – have each made more than $1 million (553,000) in the past four weeks by betting on the pound to rise against the dollar.
Even someone who made a minimum size, 1a-point upbet on the sterling-dollar rate in the week before Christmas would now be about 600 in profit, he adds.
But, of course, not everyone has got it right.
At Forex Capital Markets, an online provider of margined foreign exchange to experienced private investors, chief executive Colin Geiger says some clients have attempted to “pick the top” for the pound and the euro against the dollar.
So far, “picking the top” has been a bruising experience. However, people should not have been too badly hurt, as long as they used stop-loss levels on their trades.
For instance, someone who went short of the sterlingdollar rate at 1.7600 on Christmas Eve might have sensibly set a stop-loss at 1.7775.
If so, the trade would have been stopped out at that level on 30 December, for a loss of 175 points, instead of carrying on to yesterday and being 600 points in the red.
Ivo Coulson, an active trader and commentator for Fleet Street Publications, says: “I can see the pound rising all the way to $2 and the euro to $1.35 before the market is seen as being at the extremes.
“Hints of a rise in US interest rates would cause the dollar to rally very sharply, but I do not expect such a signal for several months.”
Day traders have not been the only breed of investor helping to drive the dollar down in recent weeks. Hedge funds have joined in the stampede and there has been persistent pressure from “real money” – blue-chip British investment funds and multinational companies.
Chris Furness, at foreign exchange analysis firm 4CAST, says: “Fund managers have been investing in American shares and overhedging that exposure by shorting the dollar, sometimes to the tune of 120% of the size of the investment.
“Corporations that derive a high proportion of their earnings from the US have also been hedging.
“An obvious way to do this would be to buy a call option on the sterling-dollar rate so that, if this rises further, the increase in the value of the option will compensate for the negative effects on profits of the exchange rate move.”
IRONICALLY, the act of hedging in this way puts additional upward pressure on the sterling-dollar rate, turning a trend into a self- fulfilling prophecy.
During the euro’s period of severe weakness in 2000-01, it required policymakers in Europe, Britain, the US and Japan to start treating the currency’s plight as a crisis before the tide turned.
The same attitude may be required with the dollar in 2004.
