Dollar to Gain as Asian Interest Rates Rise, Morgan Stanley Says

The dollar will rebound through 2011 as Asian central banks raise interest rates to curb inflation, damping economic growth and demand for the region’s assets, according to Morgan Stanley.

“We’re looking for the dollar to regain some stability over the second half of the year,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London, in a telephone interview. “We’ll see the global investment environment turn less favorable as liquidity conditions start to change at a macro level.”

The Federal Reserve’s U.S. Trade-Weighted Major Currency Dollar Index reached a record low of 68.2405 on May 2. The greenback has weakened 12 percent in the past year according to index, which measures the dollar’s performance against seven currencies.

Investor appetite for the dollar will rebound as central banks from China to India raise interest rates, Stannard said. The end of the Fed’s $600 billion asset-purchase program this month will also renew demand for the U.S. currency.

The dollar may also benefit from less selling pressure linked to the carry trade, based on less demand for assets in the Asian nations.

The carry trade of selling dollars to buy the currencies of Norway, Australia, Canada and New Zealand has lost 10 percent so far this month as investors shun assets of commodity-exporting countries. The trade returned 22 percent in the 12 months ended June 1. China is Australia’s biggest trade partner.

China raised its reserve requirement ratio last week to a record 21.5 percent for the biggest lenders. The move came hours after data showed the inflation rate climbed to 5.5 percent in May, the fastest pace in almost three years.

The Reserve Bank of India increased interest rates for the 10th time since the start of 2010 as the nation’s key wholesale-price inflation quickened to 9.06 percent in May from 8.66 percent in April.

The Swiss franc will also benefit against emerging-market currencies as nations act to curb high inflation, Stannard said. The yen will be supported in the short term, though Japan’s record earthquake in March will pressure the currency to the downside in the longer term, he said.

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