Dollar Demise Exaggerated as 13% Gain Since ‘08 Proves Value

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U.S. dollar bills are arranged for a photograph in New York on July 26, 2011. Photographer: Scott Eells/Bloomberg

Moves by the Federal Reserve to flood the world with dollars are doing little to dent the currency’s value, bolstering the appeal of U.S. assets at a time when the government needs the support of foreign investors the most.

The U.S. Dollar Index has appreciated 13 percent from a record low in March 2008 even as the Fed kept interest rates at about zero and printed cash to buy $2.3 trillion of Treasury and mortgage-related bonds, and is little changed since 1991. The International Monetary Fund said Dec. 30 that the greenback’s share of global foreign-exchange reserves rose in the third quarter by the most since 2008.

That long-term stability shows America’s currency is a store of value and may help explain why the U.S. is attracting record demand for the unprecedented amount of bonds the Treasury Department is selling to finance a budget deficit exceeding $1 trillion. Even though Standard & Poor’s stripped the U.S. of its AAA rating in August, investors see the nation as a refuge from slower global economic growth and Europe’s sovereign-debt crisis.

“The safe-haven function of the dollar is still alive,” said Achim Walde, head of global fixed income and currencies at Deutsche Bank AG’s Cologne, Germany-based Sal. Oppenheim private-wealth manager, which oversees 3 billion euros ($3.9 billion). “The dollar will be strong in 2012,” he said in a telephone interview on Dec. 29.

Currency Correlation

IntercontinentalExchange Inc.’s Dollar Index, which tracks the currency against the euro, yen, pound, Swiss franc, Canada dollar and Swedish krona, rose 1.46 percent last year. That followed a gain of 1.5 percent in 2010, marking the first time it advanced two years in a row since 2000-2001.

The Dollar Index weakened 0.9 percent to 79.532 at 1:55 p.m. New York time. The gauge is up from 70.698 in March 2008 and compares with 1991’s low of 80.34. The dollar appreciated 1.11 percent last year, the most after the yen’s 5.5 percent climb among 10 developed-nation peers as measured by Bloomberg Correlation-Weighted Indexes. The indexes show that since 1975, only the yen and Swiss franc have done better than the dollar.

The performance counters officials in China, Germany and Brazil who said that the Fed’s policies were weakening the dollar. House Speaker John Boehner of Ohio and three other Republicans sent Fed Chairman Ben S. Bernanke a letter in 2010 expressing “deep concerns” about the central bank’s plan to print money to buy bonds, saying it risked weakening the dollar and fueling asset bubbles.

Europe Crisis

That was before Europe debt crisis spread, sparking demand for the safest of assets.

Russia is now unlikely to reduce the share of U.S. assets in its international reserves, President Dmitry Medvedev’s chief economy aide, Arkady Dvorkovich, said in an interview outside Moscow on Dec. 27. The nation boosted dollars to 45.4 percent of its reserves as of June 30 from 45.3 percent three months earlier, its central bank said in a report published on Dec. 27.

For the first half of 2012, “the dollar continues to look appealing,” said Manoj Ladwa, a London-based senior trader at ETX Capital, which provides services including currency trade execution, in a Dec. 29 telephone interview. “In the second half we could have something resembling a global recovery, with potentially a bottom to this euro-zone crisis and further clarification from China on how hard or soft the landing will be. Money could then shift back away from the dollar and into riskier assets.”

Global Reserves

The U.S. dollar’s share of global foreign-exchange reserves climbed in the third quarter to 61.7 percent, the highest since late 2010, while holdings of euros fell to a three-year low of 25.7 percent, according to figures from the Washington-based IMF quarterly data.

While the dollar is up since 2008, it’s down 34 percent from its highs a decade ago, IntercontinentalExchange’s index shows. The Fed’s Trade-Weighted Real Broad Dollar Index that tracks it against those of 38 countries shows the dollar has depreciated 15 percent from its average in 1973, the year global currencies began freely floating.

The dollar has been the world’s reserve currency since the U.S. and allies agreed at the 1944 Bretton Woods conference to peg it to a rate of $35 per ounce of gold. It remained the most-traded legal tender after global currencies began freely floating in 1973, accounting for 85 percent of the $4 trillion per day foreign-exchange market, according to the Basel, Switzerland-based Bank for International Settlements.

Japan-China Accord

The currency’s value peaked in 1985 before finance ministers from the world’s largest economies forged the Plaza Accord, agreeing to weaken the dollar to reduce a record U.S. current-account deficit, the broadest measure of trade because it includes investment.

While the dollar’s shares of the more than $10 trillion in global reserves has increased, it has tumbled from a peak of 72.7 percent in 2001.

Some nations are seeking ways to reduce dollar dependence. Japan and China said last month they will promote direct trading of the yen and yuan and will encourage the development of a market for companies involved in the exchange rates.

The appeal of U.S. financial assets can be seen in the market for Treasuries, which gained 9.8 percent, the most since 2008 at the height of the financial crisis. Treasuries due in 10 years or more soared 29 percent.

Foreign Holdings

The Treasury Department attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds sold last year, the highest bid-to-cover ratio since the government began releasing the data in 1992 during the George H. W. Bush administration, according to data compiled by Bloomberg. The U.S. drew an all-time high ratio of 9.07 for $30 billion of four-week bills it auctioned on Dec. 20 even though they paid zero interest.

The amount of Treasuries held by foreigners has surged, with holdings rising to a record $4.66 trillion in September from $4.44 trillion at the end of 2010 and $3.69 trillion in December 2009, the latest government data show.

“The U.S. dollar was recognized as really the ultimate source of liquidity in terms of the very uncertain conditions in the euro-zone,” said Stewart Hall, senior currency strategist at Royal Bank of Canada in Toronto in a telephone interview on Dec. 28. “You’ve also got a U.S. economic growth dynamic that is throwing off a little bit of a feel good story that is not the case in Europe and in Asia.”

Economies Decouple

The value of the dollar will hold steady over the next year versus peers including the euro, yen, and U.K. pound, according to strategists and economists surveyed by Bloomberg.

Demand for American assets is increasing as consumer confidence, manufacturing and employment show the U.S. is strengthening as Europe struggles to save its currency union and the developed world weakens. U.S. gross domestic product will expand 2.1 percent next year, compared with 1.25 percent for all Group of 10 nations, Bloomberg surveys of economists show.

“In 2012, I believe the stronger U.S. data -- a relatively better performing U.S. economy -- will be a dollar positive,” Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley, said in a Dec. 23 interview with Owen Thomas on Bloomberg Television’s “The Pulse.”

Balance Sheets

A stronger U.S. economy is boosting speculation that the Fed won’t need to undertake a third round of bond purchases, or quantitative easing, as central banks elsewhere expand their balance sheets to counter slowing economies.

The ECB’s balance sheet expanded to a record 2.73 trillion euros, and its lending to euro-area banks jumped 214 billion euros to 879 billion euros in the week ended Dec. 23, the Frankfurt-based central bank said in a statement on Dec. 28. Its holdings were 553 billion euros more than three months ago.

The Bank of Japan expanded its asset-purchase program three times last year, to 20 trillion yen ($260 billion). The Bank of England has left its asset-buying target at 275 billion pounds ($429 billion).

“We have favored stronger dollar positions given our Fed is essentially on hold and the U.K., Euro-zone and Japanese central banks are in expansive phases,” David Kotok, the chief investment officer of Sarasota, Florida-based Cumberland Advisors, which manages about $1.8 billion, said in a telephone interview on Dec. 28. “The U.S. economy seems to be growing at a slow but steady pace and improving, while inflation is not a threat.” --With assistance from Ilya Arkhipov and Scott Rose in Moscow and Kristine Aquino in Singapore. Editors: Philip Revzin, Garfield Reynolds

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