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Morgan Stanley Joins Citigroup Seeing Inevitable Dollar Gain

Morgan Stanley and Citigroup Inc. strategists are maintaining their view that the dollar will appreciate next year, despite recent weakness, as the U.S. recovery accelerates and the Federal Reserve curbs stimulus.

“Dollar strength is going to develop next year, based on the growth story,” Ian Stannard, Morgan Stanley’s head of European foreign-exchange strategy, told the Bloomberg FX13 summit in London today. The advance will be “driven by relative monetary policy and relative investment flows,” he said.

The Bloomberg U.S. Dollar Index has fallen more than 1 percent since Sept. 17, the day before the Fed said it would keep printing cash to buy $85 billion of bonds a month because it had yet to see signs of sustained economic growth. The index had strengthened 5.5 percent in the first six months of the year as investors bet that an improving outlook would prompt the central bank to scale back stimulus.

“The Fed may have just delayed the inevitable,” Valentin Marinov, head of Group of 10 foreign-exchange strategy at Citigroup Inc. in London, said at the event. “We could be on the verge of the next dollar bull run.”

After the Fed refrained from reducing its monthly asset purchases at last month’s meeting, Chairman Ben S. Bernanke said the central bank would decide on whether to taper purchases based on “what’s needed for the economy.” The Fed signaled that day it needs to see more signs of sustained labor market gains before slowing the pace of purchases.

Taper Speculation

Companies added fewer workers than projected in September, indicating the U.S. job market is struggling to gain momentum, a private report based on payrolls showed today. The 166,000 increase in employment followed a revised 159,000 gain in August that was smaller than initially estimated, according to the ADP Research Institute in Roseland, New Jersey. The median forecast of economists surveyed by Bloomberg was for a 180,000 advance.

Speculation on when the Fed will start to withdraw stimulus is the biggest driver of foreign-exchange markets after the decision to press on with bond purchases weakened the dollar and boosted emerging-market currencies, Citigroup’s Marinov said.

The U.S. bank’s economists see a 50 percent chance that the Fed will start tapering by December, an 80 percent chance by January 2014 and a 100 percent chance by March 2014.

Biggest Losers

Emerging-market and commodity currencies will remain the biggest losers as the dollar starts to advance, Marinov said.

Morgan Stanley predicts the dollar will advance to $1.25 per euro by the middle of next year, Morgan Stanley’s Stannard said. The U.S. currency weakened 0.4 percent to $1.3584 per euro at 5:58 p.m. London time after reaching $1.3607, the weakest level since Feb. 4. The greenback depreciated 0.6 percent to 97.45 yen after touching 97.15, the weakest level since Aug. 28.

“The dollar recovery has probably been delayed” because the decision to taper stimulus was pushed back, Stannard said. “While the policy is aimed at supporting growth and asset prices, it will provide a positive environment for the dollar.”

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Neal Armstrong in London at narmstrong8@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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