The dollar may reverse its decline over the past month against all 16 most-traded currencies because speculation the Federal Reserve will resume buying fixed-income securities is overblown, according to UBS AG.
“The market may be getting ahead of itself with regard to QE expectations,” Geoffrey Yu, a foreign exchange strategist at UBS in London, wrote in a report dated today. “There are plenty of reasons why the Fed would not want to turn the taps back on. Investors should bear in mind the risk of a dollar snapback.”
Policy makers bought $1.7 trillion of mortgage and government debt, in a policy known as quantitative easing, through March to keep borrowing costs low while the economy recovered from the worst recession since the 1930s. Speculation increased that the Fed would resume purchases after Chairman Ben S. Bernanke said July 21 that the economic outlook “remains unusually uncertain.” Policy makers next meet on Aug. 10.
The Fed may be hesitant to introduce those measures because the initial round wasn’t as effective as anticipated, according to Yu. Additionally, the Bank of England’s program intended to weaken sterling resulted in a 12 percent gain, which “the Fed may wish to avoid,” the strategists said.
The central bank is trying to pare its balance sheet, not expand it, and reports like the Institute for Supply Management index show the U.S. economy’s health may not warrant further asset purchases, UBS strategists led by Yu wrote.
The dollar rallied yesterday after the ISM index of non-manufacturing businesses, which covers about 90 percent of the economy, rose to 54.3, compared with the average forecast of 53 in a Bloomberg News survey. Another report showed payrolls excluding government agencies climbed by 42,000 workers last month after a 19,000 increase the prior month, according to figures from ADP Employer Services.