Deutsche Asset Management's currency fund expects the US dollar to fall in the long term on a wide current account deficit and rising inflation. But such a view on the currency has worked against it so far.
Launched in September 2004, the fund saw steep losses earlier this year as the dollar's sharp rally caught many in the market, who had bet on a fourth year of dollar weakness, by surprise.
Stephen Kwa, a director at Deutsche Asset Management responsible for foreign exchange strategies in the Asia-Pacific region, says it has been a difficult year for currency strategy.
But a stabilisation in the dollar's pace of appreciation, coupled with positions on the euro and the Canadian dollar, have helped the fund rack up a better performance in the past three months, he told Reuters on Friday.
As of end-September, the currency fund has chalked up a year-to-date loss of 13.28 percent. It made a loss of about 8.2 percent in the six months to September, but posted a positive return of 0.3 percent in the three months to September.
"We are battling headwinds in the short term in terms of the US interest rate outlook leading to capital going into the United States," said Kwa. "Long term, our bearish view on the dollar will be positive for the fund."
The dollar has rallied 10.5 percent against the euro and 12.5 percent against the yen this year.
The fund trades mostly through forward contracts.
A bearish view on the euro and a bullish view on commodity currencies, such as the Canadian dollar, help explain an improvement in the fund's recent performance, Kwa said.
The Canadian dollar hit a 14-year high at 1.1588 per US dollar last month, bolstered by high oil prices as the market focused on Canada's position as a net oil exporter.
The S$8.85 million ($5.25 million) fund is managed by three separate teams in New York, Frankfurt and Singapore and aims to generate returns of at least five percent over the Singapore six-month interbank rate.
No performance fees have been taken to date.
Exposure to Asia came through long positions on the Singapore dollar and Malaysian ringgit, Kwa said, adding that a rebound in the city-state's economy made the Singapore dollar attractive.
"The Singapore economy is growing quite strongly, the services sector has been driving employment growth and monetary policy remains on a tightening bias," he said. "Really the Singapore currency is taken as a proxy to the Asian region, so for those factors we are long the Sing dollar."
News this week that Singapore's manufacturing output rose 9.6 percent in September from August, has prompted analysts to expect an upward revision to third-quarter economic growth numbers.
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