Best Currency Forecasters Say Dollar Slump Coming to an End
The best currency forecasters say the dollar’s 12 percent slide over the past year is coming to an end as Europe’s deepening debt crisis discourages bets against the world’s reserve currency.
Led by Schneider Foreign Exchange Ltd., the five most-accurate firms during the six quarters through June 30 as measured by Bloomberg see the dollar trading at $1.42 per euro on average by year-end, compared with $1.43 on July 8. Against the yen, they predict the greenback will rise to 83 from 80.64.
While Moody’s Investors Service added to Europe’s woes last week by lowering Portugal’s credit ranking to junk, the dollar is regaining its status as a haven after the worst performance over the past year among 10 developed-market currencies based on Bloomberg Correlation-Weighted Indexes. The dollar is up 5.9 percent from a 17-month low on May 4 against the euro.
“There’s not a lot of room left for it to weaken beyond $1.50 to the euro, and we still see it recovering to about $1.40 by year-end,” said Stephen Gallo, head of market analysis at Schneider in London, who had an average margin of error of 5.05 percent across all currency pairs. “The risk of a disorderly default is, for now, much higher in Europe than in the U.S.”
Hedge Fund Bets
Hedge funds and other large speculators are no longer betting the dollar is going to collapse.
Wagers on a decline against peers including the euro, yen and pound were 203,230 on July 5, data from the Commodity Futures Trading Commission in Washington showed last week. That’s down from 405,267 in March, the most since at least November 2003.
“It’s difficult for the dollar to fall out of bed,” said Paul Mackel, director of currency strategy in London at HSBC Holdings Plc, the eighth most-accurate forecaster. “The euro-zone crisis has definitely slowed the pace of dollar weakness. The dollar is still the reserve currency of the world and will be for some time to come.”
HSBC sees it ending the year at $1.44 per euro, compared with $1.4037 as of 10:23 a.m. in New York. It earlier strengthened to $1.4026, the highest since May 25. The greenback accounted for 60.7 percent of the world’s currency reserves in the first quarter, compared with 61.8 percent a year earlier, the International Monetary Fund in Washington said June 30.
The U.S. currency rallied 1.8 percent last week against the 17-member euro and has dropped 5.4 percent this year. It fell 0.3 percent today to 80.42 yen.
The dollar has stabilized as the euro-region debt crisis worsened, forcing Greece to seek a second bailout in little more than a year from the European Union and the IMF, stirring speculation Portugal and Ireland will follow.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against those of six trading partners, rose in four of the past five weeks as the German government and the European Central Bank debated how best to ward off a Greek default and investors fled riskier assets.
EU leaders are pushing banks and insurance companies who hold Greek bonds to contribute to a new aid package after last year’s 110 billion-euro ($156 billion) rescue failed to stop the region’s debt crisis from spreading.
The threat of contagion has sparked a surge in the cost of insuring against Spanish and Italian defaults, with the yields on the 10-year securities rising to euro-era record spreads with equivalent German debt today.
“Everyone is aware inside and outside of the euro area that these countries cannot bail themselves out of these debt burdens,” said Schneider’s Gallo in a Bloomberg Television interview with Betty Liu on “In the Loop.” “The bottom line is there is no way to ring fence this entirely the losses are going to have be swallowed.”
Earnings growth is rebounding in the U.S., albeit at a slower pace. Companies in the Standard & Poor’s 500 Index (SPX) are poised to boost income by 19 percent in 2011, including a 13 percent advance in the second quarter, according to analyst estimates compiled by Bloomberg.
The gain will push profits back in line with their average increase of 6.9 percent over the last 51 years, data compiled by Brockhouse & Cooper Inc. and Bloomberg show.
“Our central scenario is that the U.S. dollar is bouncing along the bottom,” said Richard Grace, chief currency strategist and head of international economics in Sydney at Commonwealth Bank of Australia, the ninth-best forecaster.
Concern the U.S. economy will falter and a growing debt load may hurt the dollar.
Data from the Labor Department in Washington on July 8 showed employers added jobs in June at the slowest pace in nine months. Payrolls rose by 18,000, less than the 105,000 positions forecast in a Bloomberg survey of economists.
The U.S. economy may grow 1.1 percent in the 12 months ending June 2012, according to research by the Federal Reserve Bank of Cleveland using Treasury yields and growth data for the past five years to project output for the coming 12 months. That’s less than half the 2.7 percent to 2.9 percent range projected by the Fed in its official estimates.
The U.S. risks missing debt payments should Republicans and Democrats fail to agree on raising the $14.3 trillion federal borrowing limit before an Aug. 2 deadline. S&P said June 30 it would cut the U.S.’s credit rating to D, the lowest level on its scale of creditworthiness, should a failure to raise the debt limit lead to a default.
“It’s really hard to build a near-term to six-month story where the U.S. dollar rallies when they have no credible fiscal plan in place,” said Camilla Sutton, chief currency strategist in Toronto at Bank of Nova Scotia. The firm is the seventh-ranked forecaster in the survey.
‘Negative on Dollar’
The dollar will slide to $1.52 per euro by year-end, following a decline to $1.50 by the end of the third quarter, according to Societe Generale SA, the second-most accurate forecaster, whose average margin of error was 5.21 percent.
“I’m negative on the dollar,” said Kit Juckes, London-based head of foreign-exchange research at the company. “The U.S. favors a weaker currency as part of its economic solution and with employment well below where they want it to be, the Fed will keep rates lower for longer.”
The Fed won’t raise its target interest rate for overnight loans between banks, currently a range of zero to 0.25 percent, until the second quarter of 2012, according to the median forecast of 33 analysts surveyed by Bloomberg.
Schneider’s Gallo estimates the dollar will end the year at $1.40, about 1.9 percent stronger from last week, and number three Wells Fargo & Co. predicts a recovery to $1.39.
Fourth-ranked JPMorgan Chase & Co. sees the dollar weakening to $1.48 by year-end. Credit Agricole SA, the most bullish dollar forecaster and ranked fifth in the survey, estimates $1.30.
“The safest bet is to stay long the dollar against the yen,” said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York, the third-most accurate forecaster. “As soon as the market starts to see a shift in interest-rate futures, that would be enough for the dollar to move higher. We expect this to happen by the end of the fourth quarter.”
While the Fed repeated after last month’s meeting it will keep its key rate at a record low for an “extended period,” the U.S. currency may find support from the June end of the central bank’s asset-purchase program, or quantitative easing, known as QE2, which helped depress bond yields this year.
“We don’t have a scenario where the U.S. economy weakens a lot further or in a prolonged sense such that the Fed then undertakes another round of quantitative easing,” said John Kyriakopoulos, head of currency strategy at National Australia Bank Ltd. in Sydney, the number six forecaster. “We don’t see a further large fall in the U.S. dollar.”
‘Positive Dollar Impact’
The dollar appreciated on June 22 after Fed Chairman Ben S. Bernanke ruled out a third round of asset purchases.
“As U.S. bond yields begin to gradually drift upwards in anticipation of policy normalization from the Fed, a lot of the liquidity that has drained out of the U.S. is going to flow back again,” said Daragh Maher, deputy head of global foreign-exchange strategy at Credit Agricole Corporate & Investment Bank in London, which had a margin of error of 5.65 percent. “That’s going to have some positive dollar impact.”
Currency forecasters were ranked according to the accuracy of their estimates for the six quarters beginning with the first three months of 2010. Long-term accuracy was judged by a forecast for the twelve-months to end-June 2011.
Only firms with at least four forecasts for a particular currency pair were ranked, and only those that qualified in at least five of eight pairs were included in the ranking of best overall predictors. In all, 50 firms submitted enough forecasts to be ranked in at least one currency.