Andrew Harrer/BloombergCentral bank policies are helping the U.S. recover from the biggest downturn since the Great Depression.Bloomberg News Apr 11, 2011 – 11:31 AM ET | Last Updated: Apr 11, 2011 1:57 PM ET By Allison Bennett and Garth Theunissen
The most-accurate currency strategists see no recovery for the dollar in coming months as the Federal Reserve delays raising interest rates after the end of its US$600-billion asset-purchase program in June.
Wells Fargo & Co., the top forecaster for the second straight quarter, and No. 2 St. George Bank Ltd., say America’s currency will be little changed through June as the Fed lags behind central banks boosting rates. Schneider Foreign Exchange Ltd., Societe Generale SA and Bank of Nova Scotia, the next three analysts during the six quarters ended March 31 as measured in data compiled by Bloomberg, say the dollar will keep falling after its weakest start to a year since 2008.
“The currency of just about any central bank that has been willing to contemplate an interest-rate hike in this environment has performed strongly as money flowed to higher yield assets,” said Kit Juckes, London-based head of foreign-exchange research at Societe Generale. “The U.S. would like to keep interest rates as low as possible for as long as it can.”
While diverging central banks may stop the dollar from appreciating from a 16-month low, the policies are helping the U.S. recover from the biggest downturn since the Great Depression as the Fed begins to drain some of the more than US$2-trillion of stimulus it pumped into the economy. U.S. exports have risen each month since August to a record US$167.7-billion in January, Commerce Department data show.
Helping Obama
Fed policy has also helped keep borrowing costs on 10-year Treasury notes below a two-decade average of 5.22 percent for the entirety of President Barack Obama’s term, helping the U.S. fund a deficit the Congressional Budget Office projects will be in excess of US$1-trillion for a third consecutive year. Obama and congressional leaders agreed on April 8 to cut about US$38-billion of federal spending to avert a partial government shutdown with less than two hours to spare.
Treasuries due in one-to-three years yield about 0.78 percentage point less on average than the rest of the global market for government bonds of similar maturity, Bank of America Merrill Lynch indexes show. There was no difference in the yields a year ago. In that period, IntercontinentalExchange Inc.’s U.S. Dollar Index fell 7.5% and was trading at 74.953 as of 9:56 a.m. in New York.
“We have to get past this period of very easy monetary policy from the Federal Reserve, but then we feel that the dollar is going to make a comeback against the euro and yen,” said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York. Low expectations for any rise in rates also means there’s more room for a shift in perception that may benefit the dollar at the conclusion of quantitative easing, he said.
Higher Rates
The dollar dropped 1.7% last week to US$1.4483 per euro, and strengthened 0.8% to 84.76 yen as the European Central Bank boosted its benchmark rate on April 7 to 1.25% from 1%, and ECB President Jean-Claude Trichet signaled more increases may be on the way. The greenback traded at $1.4449 and 84.62 yen today.
Brazil, Chile and Colombia have raised rates twice this year while Peru has lifted them by 25 basis points every month in 2011. Sweden, Hungary, Poland, China, India, Indonesia and Taiwan also increased borrowing costs in 2011, with the U.K. predicted to join them, according to Bloomberg surveys.
The median estimate of more than 70 economists surveyed by Bloomberg is for the Fed to keep its target rate in a range of zero to 0.25% through year-end.
Bank of Nova Scotia in Toronto predicts the dollar will end this year at $1.45 per euro, and Schneider sees the U.S. currency at $1.42. Wells Fargo predicts an advance to $1.40 at the end of June and $1.34 by year-end, while St. George forecasts $1.38 at the end of December. Societe Generale says it will slide to $1.50. The median of 44 estimates compiled by Bloomberg is for the greenback to climb 6.3% to $1.36.
Dollar Bull
Statements by central bankers have encouraged dollar bulls.
Fed Bank Presidents Thomas Hoenig, Jeffrey Lacker, Charles Plosser and James Bullard have signaled optimism about the U.S., with St. Louis Fed President Bullard saying the central bank may be able to cut about US$100-billion from its $600 bond-buying plan. The Federal Open Market Committee has reiterated rates will be kept at “exceptionally low levels” for an “extended period” for the past 25 months.
Futures traders have trimmed holdings on the dollar’s decline over the last month, data from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a drop in the dollar compared with those on a gain reached 405,267 last month, the most since the data began in 2003.
Repeat Performance
Strategists are betting the currency market won’t repeat its performance following the end of the first round of Fed bond purchases, or quantitative easing, in March 2010. Back then, the Dollar Index posted a two-month, 10 percent rally to a 15-month high. The index tracks the currency against the yen, euro, pound, Swiss franc, Canadian dollar and Swedish krona.
That rally was underpinned by a flight to safety as Europe’s debt crisis erupted, resulting in a bailout of Greece. Europe’s leaders last month beefed up an aid fund for nations that can no longer fund themselves.
Spanish 10-year bonds have rallied relative to benchmark German bunds this year, indicating the risk of contagion has diminished after Ireland and Portugal also requested aid. The yield spread narrowed to 1.78 percentage points last week from a euro-era record of 2.98 percentage points on Nov. 30.
Euro Surge
Europe’s unified currency gained 3.5% in the first three months of this year against a basket of currencies tracked by Bloomberg Correlation-Weighted Indexes, the best first quarter performance since the shared currency was introduced in 1999. The euro advanced last week even as Portugal said it needed rescuing as well.
“Even though there will be times that the euro shakes on the back of sovereign concerns, overall at this point the framework is in place to support Europe,” said Camilla Sutton, chief currency strategist at Bank of Nova Scotia in Toronto.
The ECB’s primary mandate is containing inflation, while the Fed must also promote full employment. The U.S. central bank’s preferred measure of inflation was 0.9% in February. Consumer prices that month rose 2.4% in the euro region and 4.4% in the U.K., both of which target about 2%.
U.S. Unemployment
Policy makers may avoid raising rates even if U.S. inflation accelerates as long as unemployment remains elevated, according to Stephen Gallo, head of market analysis at Schneider Foreign Exchange. The Labor Department said April 1 that the jobless rate was 8.8% in March, compared with 4.6% the last time the central bank boosted benchmark borrowing costs in mid-2006.
While weakening, the dollar remains the world’s reserve currency. The dollar’s share of foreign reserves held steady in 2010, ending at 61.4%, according to the International Monetary Fund in Washington. The dollar was involved in 85% of currency trades from April 2007 to April 2010, compared with 90% in the three years through 2001, data compiled by the Bank for International Settlements in Basel, Switzerland show.
China, the largest investor in U.S. government debt after the Fed, has increased its Treasury holdings by 30% to US$1.154-trillion in January from a year earlier, helping the U.S fund its fiscal deficit and keep interest rates at a record low. Japan’s Treasury holdings have climbed 16% to US$885.9-billion over the same period.
‘Structural Decline’
The dollar’s decline has supported the U.S. economy, with the trade deficit 30% smaller than before the financial crisis in August 2008. The economy may expand 3.1% this year, compared with 2.2% for the euro area, 1.8% for the U.K., 0.8% for Japan and 2.8% for Canada, according to Barclays Capital.
“The Fed will be quite late in raising rates,” said Besa Deda, chief economist at St. George, a unit of Westpac Banking Corp. “I’m not looking for a lot of dollar strength as I still think the U.S. dollar is in a structural long-term decline.”
Bennenbroek was the best forecaster for the second-straight quarter, helping Wells Fargo beat 51 firms across eight currency pairs with a 4.61% average margin of error, even as his call for a stronger greenback failed to materialize, data compiled by Bloomberg show. The firm’s margin in the survey ended Dec. 31, 2010, was 4.97.
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