Dollar Cheap in Purchasing Power as Investors See Shelter
The dollar is poised for its biggest monthly gain since May, reclaiming its status as a haven while Switzerland and Japan boost efforts to weaken their currencies.
The greenback has appreciated 1.2 percent in August against a basket of the developed world’s nine most-traded exchange rates, according to data compiled by Bloomberg. That compares with a decline of 14 percent in the world’s reserve currency from this time last year through July.
Demand for U.S. assets is rising even though the Federal Reserve has pledged to keep its benchmark interest rate near zero through mid-2013 and Standard & Poor’s cut the nation’s credit rating from AAA. The two other currencies considered havens in times of financial and political strife -- the Swiss franc and yen -- are under siege by their governments and central banks after strengthening to records.
“The dollar is a buy through the end of the third quarter,” Nick Bennenbroek, head of currency strategy in New York at Wells Fargo & Co., the third-most accurate forecaster in the last six quarters as measured by Bloomberg, said in an Aug. 23 telephone interview. “The yen and the Swiss franc are very expensive and the dollar is very cheap and it’s the only major central bank that is not standing in the way of a currency advance.”
The dollar was little changed at 76.66 yen at 7:38 a.m. in New York after strengthening 0.1 percent to 76.64 last week. It gained 1.2 percent versus the franc to 81.58 centimes after rallying 2.7 percent last week. The Bloomberg Correlation- Weighted Currency Index for the dollar dropped 0.1 percent to 89.3884, up from 88.3486 at the end of July.
Purchasing Power Parity
Even with the gains, America’s currency is 47 percent too weak against the franc and 31 percent undervalued compared with the yen, based on an index developed by the Organization for Economic Cooperation and Development in Paris that measures currencies using prices for similar goods and services in two countries.
The dollar may continue to appreciate as the Swiss National Bank and Bank of Japan intervene to stem gains and currencies of commodity-producing nations such as Australia, New Zealand and Canada lose some of their luster amid a global economic slowdown.
‘Dollar Is Cheap’
“The dollar is cheap against the G-10 small currencies like Australia, Canada, New Zealand, Sweden, Norway, Swiss and also against the yen,” Greg Anderson, a senior currency strategist at New York-based Citigroup Inc., said in a telephone interview Aug. 14. “If we have continued turbulence with commodities and equities selling off, the dollar is a short-term buy.”
America’s currency is 37 percent below fair value against the Australian dollar and 20 percent versus the Canadian dollar, according to the OECD index.
The dollar has mainly weakened since Fed Chairman Ben S. Bernanke signaled last year at an annual conference sponsored by the Federal Reserve Bank of Kansas City that the central bank may boost the economy by printing money and buying bonds. It purchased $600 billion of Treasuries between November and June, contributing to a 6.25 percent drop in the U.S. currency as measured by Bloomberg Correlation-Weighted Indexes.
Bernanke said at an annual forum in Jackson Hole, Wyoming, on Aug. 26 that the central bank still has tools to stimulate the economy without providing details or signaling when or whether policy makers might deploy them.
Slowing growth in the U.S. and the Fed’s pledge to keep its target rate for overnight loans between banks at a record low of zero to 0.25 percent until mid-2013 may constrain the greenback. Citigroup lowered its 2011 U.S. growth estimate to 1.6 percent from 1.7 percent, and Goldman Sachs Group Inc. said it saw a one-in-three chance of a recession as it cut its gross domestic product forecast to 1.7 percent from 1.8 percent.
“Until we can get to a point where the dollar can demonstrate some independent strength, like the economic data justifies the Fed to provide some interest rate support, we don’t think the dollar can shine,” Robert Sinche, the global head of foreign exchange strategy at Royal Bank of Scotland Group Plc, said Aug. 24 in a telephone interview from Stamford, Connecticut.
RBS predicts the dollar will trade at $1.45 versus the euro by the end of the third quarter, from $1.4499 last week, and at $1.06 against the Australian currency, from $1.0573.
Increased Dollar Demand
Demand for the U.S. currency has increased as S&P’s Aug. 5 downgrade of the nation’s credit rating to AA+ caused stock markets to gyrate and sent investors to the safety of Treasuries. Investors repudiated the ratings company’s assertion that the U.S. was less creditworthy, driving 10-year note yields to record low 1.9735 percent on Aug. 18. The dollar appreciated the last month against all but one of the 16 most-traded currencies as tracked by Bloomberg, falling versus the yen.
“The downgrade obviously caused a big risk-aversion theme that is still en vogue,” Blake Jespersen, the director of foreign-exchange at Bank of Montreal in Toronto said Aug. 24 by telephone.
Strategists don’t expect the dollar to falter in the slowing economy. It will remain unchanged on average by the fourth quarter against currencies of the Group of 10 Nations, according to estimates of strategists compiled by Bloomberg.
Main Reserve Currency
The dollar represents 60.7 percent of the world’s currency reserves, compared with 26.6 percent for the euro, which has the next biggest portion, according to the International Monetary Fund in Washington. That leaves investors with few alternatives as the Swiss National Bank and Bank of Japan step up their efforts to curb gains in their currencies, according to Jespersen.
“The SNB and the BOJ have been very aggressive, not only in talk but in action, and therefore safe-haven flows are being allocated more toward the U.S. dollar,” Jespersen said.
Gains of 10 percent in the Swiss franc and 4.5 percent for the yen in the past three months have weighed on the export- reliant economies and prompted the central banks to take action to curb further appreciation.
The SNB lowered its target for three-month franc London interbank offered rate, or the rate banks charge to lend to each other in Swiss francs for three months, to “as close to zero as possible” on Aug. 3. It said it may take further steps.
The yen has erased all its losses since the Bank of Japan intervened Aug. 4 and expanded monetary stimulus by 10 trillion yen ($130.5 billion). Finance Minister Yoshihiko Noda introduced a $100 billion funding program last week for Japanese businesses intended to encourage the exchange of “yen-denominated funds to foreign currencies.”
“There are few currencies left to buy that don’t mind going up,” Kit Juckes, head of foreign-exchange research in London for Societe Generale SA and the second-most accurate currency forecaster as measured by Bloomberg said in an interview last week. “How much weaker can the dollar get?”
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