Dollar Rebound Delayed to 2012 as Fed Meets Slower Growth
Slowing U.S. growth and the widening interest-rate gap between America and the rest of the world may mean no rebound this year for the dollar, the world’s worst- performing major currency in the past three months.
The Federal Reserve’s U.S. Trade-Weighted Major Currency Dollar Index fell to a record low last month after policy makers in Australia and Canada, and the European Central Bank raised rates to damp inflation. Even after the declines, strategists from Barclays Plc and Morgan Stanley are cutting their forecasts for the greenback.
Optimism that the dollar would strengthen as soon as June when the Fed stops printing cash to buy $600 billion of Treasuries is giving way to bearishness after the economy slowed more than forecast last quarter and the Fed said record low rates are needed to foster growth. While a weaker dollar may signal waning confidence in the U.S., it may help President Barack Obama reach his goal of doubling exports by 2015 and reducing unemployment.
The dollar is “probably going to get even cheaper,” said Thomas Stolper, the chief currency strategist at New York-based Goldman Sachs Group Inc., the fifth-biggest U.S. bank. The outlook for growth in the next few months “doesn’t look particularly strong,” he said in a phone interview last week.
The Fed index, measuring the dollar’s performance versus seven currencies, dropped to a record low of 69.0337 on April 21 from last year’s high of 80.5195 in June. U.S. growth decelerated to a 1.8 percent annualized pace in the first quarter from 3.1 percent in the final three months of 2010, a Commerce Department report on April 28 showed. The median estimate in a Bloomberg News survey of 80 economists was for expansion of 2 percent.
Fed Chairman Ben S. Bernanke, who has kept the target rate for overnight loans between banks in a record low range of zero to 0.25 percent since December 2008, said last week that there will be no change for an “extended period,” which means “for a couple of meetings.” The Federal Open Market Committee meets every six to eight weeks.
The difference in the number of wagers by hedge funds and other speculators on a decline in the dollar against a range of currencies compared with those on a gain rose to 357,410 on April 26 from 339,796 a week earlier, approaching the record 398,594 set in March, figures released by the Washington-based Commodity Futures Trading Commission on April 29 showed.
The last time the contracts indicated a bet on a rise in the dollar was July.
“If the Fed is keeping rates very, very low for a long period of time, it just makes the dollar less and less attractive,” Stephen King, the chief economist at London-based HSBC Holdings Plc, said in an April 28 interview on Bloomberg Television’s “On the Move” with Francine Lacqua. The decline “will continue through the course of this year,” he said.
Central banks in Sweden, Canada and the euro region have raised borrowing costs, attracting foreign investment and boosting their currencies. The European Central Bank increased its rate by 0.25 percentage point to 1.25 percent last month.
Yields on Treasuries due in one to three years are 1 percentage point below that of government debt with similar maturities in the rest of the world on average, Bank of America Merrill Lynch indexes show. A year ago, there was no difference. Shorter maturity German notes yield 117 basis points, or 1.17 percentage points, more than Treasuries, up from about 15 basis points in December.
“Longer-term, we remain bearish on the dollar because of the U.S. policy,” said Mark Hewlett, a managing partner at Anello Asset Management in London. The company declined to say how much it oversees. “The Fed has probably forgotten how to raise rates.”
Bloomberg Correlation-Weighted Indexes show the dollar fell 5.9 percent the past three months, more than any of nine other major currencies and exceeding the yen’s 5.5 percent drop. It weakened 0.8 percent last week to 81.19 yen and 1.7 percent against the euro to $1.4807. Goldman’s Stolper said the dollar will trade at $1.50 per euro in the next 12 months.
The U.S. Dollar Index, which measures the greenback versus six trading partners, fell 3.9 percent last month, while the Standard & Poor’s GSCI Total Return Index of 24 commodities rose 4.6 percent, the MSCI World Index of equities gained 4 percent, and bonds of all types returned 0.9 percent on average, based on Bank of America Merrill Lynch’s Global Broad Market Index.
Strategists are struggling to keep up with the dollar’s decline. While they raised their year-end euro estimate an average of 2.2 percent in April, the most of any Group of 10 currency, the median forecast of $1.38 per euro is still stronger than current market rates, according to data compiled by Bloomberg.
Barclays revised its dollar forecast last month, estimating it will trade at $1.46 per euro by the end of the year, from $1.44 predicted earlier. Last week Morgan Stanley said it sees the euro at $1.49 by the fourth quarter of 2011, up from a previous estimate of $1.45.
The dollar may rebound if signs emerge that growth is picking up enough to prompt the Fed to tighten credit sooner than forecast or a shock to the financial system causes investors to seek the safety of U.S. assets. The Dollar Index surged 12 percent in the second half of 2008 as the credit crisis intensified and jumped more than 10 percent in the first half of 2010 as Europe’s sovereign debt woes emerged.
“The main scenario is for more policy normalization in the U.S.,” said Henrik Gullberg, a strategist in London at Deutsche Bank AG, the world’s biggest currency trader according to Euromoney Institutional Investor Plc. “If we see signs that the global recovery is losing some momentum, that wouldn’t be good for risk appetite and what isn’t good for risk appetite would be positive for the dollar.”
The Dollar Index fell for a 10th straight day today, the longest slump since May 1994, dropping 0.1 percent to 72.848. It earlier rose after Obama said al-Qaeda leader Osama bin Laden was killed by U.S. operatives in Pakistan.
While the economy slowed in the first quarter, reports this week may show that the Institute for Supply Management’s manufacturing index held at about the highest level since 2004 in April and that the economy added at least 190,000 jobs for the third straight month, Bloomberg surveys show.
Gross domestic product is likely to grow at a 3.4 percent annualized rate in the fourth quarter, according to the median estimate of more than 70 economists surveyed by Bloomberg.
Morgan Stanley strategists said in an April 28 report that although they “remain bearish” on the dollar in the “near term,” they “foresee a powerful reversal” when the Fed begins to tighten policy in 2012.
The dollar is helping U.S. sales abroad. Exports rose to $165.1 billion in February from $126.9 billion two years earlier. Obama said in January that the country was on course to meet his goal of doubling annual foreign sales to more than $3 trillion by 2015.
A weaker exchange rate hasn’t diminished demand for U.S. financial assets that the Treasury Department relies on to finance the $1.4 trillion deficit. The Fed said its holdings of Treasuries on behalf of foreign central banks and investors rose to a record $2.675 trillion as of April 27, up from the low this year of $2.598 trillion on Jan. 19.
The biggest beneficiaries of the decline are the currencies of nations that have begun raising interest rates.
Australia’s dollar has risen 7 percent this year, reaching a record $1.1011 today. The nation’s central bank has raised its main rate to 4.75 percent from 3 percent in 2009. Its two-year government notes yield 4.38 percentage points more than Treasuries of similar maturity, above the average of 2.57 percentage points the past decade, Bloomberg data show.
CFTC data show net long positions, or bets the so-called Aussie will appreciate, reached 90,938 on April 5, the highest since Bloomberg began collecting the data in 1993.
In Sweden, where the Riksbank has boosted its key rate to 1.75 percent from 0.25 percent in June, the krona has strengthened about 11 percent this year. Canada’s dollar is up 5.2 percent and the euro almost 11 percent. Canada raised its key rate in September, with Sweden increasing its benchmark for a sixth time since July last month.
Even if relative rates weren’t an issue, the U.S.’s bulging deficit and debt load would still likely weigh on the greenback, according to Jeremy Stretch, London-based executive director of foreign-exchange strategy at Canadian Imperial Bank of Commerce.
Standard & Poor’s put a “negative” outlook on the U.S. AAA credit rating April 18, saying there is a one-in-three chance of a downgrade unless lawmakers agree on a plan by 2013 to reduce budget deficits and the national debt. Congress is set to begin debate soon on raising the government’s $14.29 trillion limit, which the Treasury predicts will be reached this month.
“The ability of the U.S. to get its own fiscal house in order is becoming increasingly pertinent,” Stretch said.