'A Trader's Dream' In Currency Markets As Dollar Dances

Voltron says: Foreign Exchange was my old stomping ground . . .

 

By JOANNA SLATER
The Wall Street Journal

This year has been the worst of times for many on Wall Street, but for currency traders, it has been a bonanza.

Rather than getting sucked under the waves of volatility that have roiled markets, they have managed to surf them.

Many are profiting from big swings in currency values and an explosion of business from customers seeking protection from further fluctuations.

The long-running decline in the dollar accelerated earlier this year, providing an opportunity for traders, though lately they are trying to take advantage of its modest rebound.

"These are great markets -- they are fast-moving, trending markets," says Russell LaScala, head of currency trading at Deutsche Bank in New York. "It's a trader's dream."

Before last August, calm markets meant daily currency moves equal to a fraction of a percent. Since the credit crunch began, some currencies have had 2% to 3% swings in a day.

Trading and selling currencies and interest-rate instruments provided a badly needed flow of profits to major investment banks in the first quarter.

J.P. Morgan Chase & Co., Goldman Sachs Group Inc., Morgan Stanley and Merrill Lynch & Co. said their respective revenue from this area in the first quarter hit records. At Merrill, the proceeds were double those of the year-earlier quarter. Citigroup Inc. also reported record revenue from currencies.

Deutsche Bank in late April said "substantial year-on-year revenue growth" in foreign exchange, interest-rate instruments and commodities helped counterbalance the damage from spoiled bets in mortgage-related securities.

Banks act as middlemen in currency transactions, collecting a small fee -- or "spread" -- in the process. Increased trading volume has helped them.

They also execute their own trades, profiting from market trends and sometimes magnifying the moves by trading with borrowed money. The dollar has been pounded in recent months by the dismal outlook for the U.S. economy and by lower interest rates, which make short-term dollar deposits less attractive.

In recent days, the dollar has stabilized, but over the past 12 months, it has lost about 12% of its value against the euro and 13% against the Japanese yen.

With the dollar generally weaker, the price of oil rising and questions abounding over where short-term interest rates were headed, investors and businesses around the globe have rushed to prepare for a changed situation. "Clients have been highly active in both risk-taking and hedging," says Matthew Zames, global head of rates and foreign exchange at J.P. Morgan Chase.

For currency traders, the surge in volatility also has led to a shift in approach. Many used to favor bets that capitalized on the gap in interest rates between different countries, a strategy that thrives in a calm environment. "Now all of a sudden other [strategies] are back alive," says Martin Wiedmann of Quaesta Capital, a currency specialist based in Switzerland. They include plays on the momentum of exchange rates and the prices of currency derivatives.

With currencies, it is just as easy to bet that say, the euro, will strengthen as it will weaken (unlike in stocks, where betting on a decline requires borrowing shares and buying them back at a later date). There is also increasing interest in trading emerging-market currencies, which now are involved in about a fifth of daily turnover. Since August, the volatility in nearly all currency pairs has jumped. "When market volatility is high and investors are increasingly discriminating by fundamentals, currency traders will do particularly well," says Alan Eisner of Millennium Global Investments, a London currency specialist that manages more than $13 billion. The firm's currency fund was up more than 8% in the first quarter, compared with a 1% loss the year earlier.

Hedge funds that focus on currencies have posted gains in each of the first three months of this year, according to the Parker FX Index, which tracks more than 80 such funds. In March, the best performer was a fund run by John W. Henry & Co., which rose 14%. In a note to investors, the firm said its trading strategy "generated profits in most of the major currencies against the dollar."

Meanwhile, in currency markets Thursday, the dollar was little changed against the euro after European Central Bank President Jean-Claude Trichet held firm to his previously expressed worries over inflation and the possible need to raise interest rates. The ECB had decided Thursday at its regular meeting to maintain its benchmark lending rate at 4.0%.

Late afternoon in New York, the euro was at $1.5398 from $1.5406 late Wednesday, while the dollar was at 103.92 yen from 104.77. The British pound was at $1.9532 from $1.9533.