Dollar Shortage Seen in $2 Trillion Gap Says Morgan Stanley
Central banks rebuilding foreign- exchange reserves at the fastest pace since 2004 are crowding out private investors seeking U.S. dollars, boosting demand even as the Federal Reserve considers printing more currency.
After falling to an all-time low of 60.5 percent in the second quarter of last year, the dollar’s share of global reserves rose 1.6 percentage points to 62.1 percent in December, the latest International Monetary Fund figures show. The buying has left the private sector with $2 trillion less than it needs, according to investment-flow data by Morgan Stanley, which sees the dollar gaining 8.2 percent in 2012, the most in seven years.
While the Fed has created more than $2 trillion under its stimulus programs since 2008, the flows signal that there may actually be a shortage of dollars to meet demand as Europe’s debt crisis deepens and the global economy slows. The dollar has risen 3.5 percent since the end of April against a basket of the most-widely traded currencies even amid speculation that the Fed, which meets this week, may undertake the type of stimulus measures that weakened it in the past.
“The market often assumes that people are long dollars, but many of those dollars are held by central banks, which are unlikely to move out,” Ian Stannard, head of European currency strategy at Morgan Stanley in London, said in a June 13 interview. “That leaves us with the private sector, which is short,” meaning they don’t have enough of them, he said. “In an environment where we see a global slowdown, the dollar will be well supported.”
Morgan Stanley says the potential scarcity of dollars among foreign private borrowers represents the U.S.’s net position with lenders abroad of minus $2.4 trillion, adding $4.8 trillion of U.S. financial assets held by central banks, and subtracting $500 billion of foreign official assets held by the U.S.
That equals about $2 trillion of demand from foreign private banks and companies. The gap has expanded from $400 billion in 2008, according to the New York-based firm. In 2002, there was a dollar surplus of $900 billion, the data show.
“We expect the dollar to continue to strengthen in the coming months on risk aversion stemming from the euro crisis,” strategists at the investment banking unit of Charlotte, North Carolina-based Bank of America Corp., wrote in a research report dated June 15.
The dollar extended last week’s 1 percent drop against the euro as projections indicated politicians who support Greece’s bailout won enough seats in elections to control parliament, easing concern the nation would be forced out of the euro bloc.
The greenback strengthened 0.3 percent to $1.2590 per euro at 9:38 a.m. New York time, adding to its four-month gain of 4.2 percent. It was 0.3 percent higher versus the yen at 78.96. Japan’s currency is the only major one that has appreciated against the dollar this quarter, data compiled by Bloomberg show.
The decline is an opportunity to buy, according to Stannard and Barclays Plc. Morgan Stanley sees the dollar at $1.19 per euro by year-end, from $1.2961 on Dec. 30, Stannard said. That would be the biggest annual advance since the dollar surged about 14 percent in 2005. Barclays, based in London, also forecasts the U.S. currency will finish the year at $1.19.
Strategists have raised their year-end estimates for the dollar against the euro by about 4 percent since April, to $1.25, after holding it at $1.30 for every day but two during the first four months of the year, according to the median of 55 forecasts compiled by Bloomberg.
Aggregate bets the dollar will strengthen against the euro, the yen, the Australian, Canadian and New Zealand dollars, the pound, the Swiss franc and the Mexican peso totaled 301,021 contracts as of June 12, according to Washington-based Commodity Futures Trading Commission data compiled by Bloomberg.
The record of 311,052 was set a week earlier, and compares with a net 17,592 contracts betting on weakness as of May 1.
The dollar is being sought as Europe’s leaders struggle to resolve the fiscal turmoil that began almost three years ago in Greece and spread across the 17-nation currency bloc, prompting the nation along with Ireland, Portugal and Spain to request international aid.
Greece’s largest pro-bailout parties, New Democracy and Pasok, won enough seats to forge a parliamentary majority, official projections showed after yesterday’s election.
Spain’s 10-year bond yield surged to a euro-era record 6.998 percent on June 14, less than a week after the fourth- largest euro member requested a 100 billion-euro ($127 billion) bailout for its banks. The similar-maturity Italian yield rose to 6.342 percent, the highest since Jan. 20.
Deposits held by foreign lenders at the Fed climbed to $864 billion at the end of May, central bank data show. That’s the most since October 2011 and more than twice the amount in September 2009, before a new Greek government sparked the debt crisis by disclosing a budget gap that was about twice what the previous administration had declared.
For Michael Sneyd, a currency strategist at BNP Paribas SA in London, the dollar will be the most vulnerable among the Group of 10 currencies as the economy slows and monetary easing by central banks around the world boosts demand for higher- yielding alternatives.
“We expect further policy easing and further fiscal easing in China, which will improve the outlook for China and Asia,” Sneyd said in a June 13 phone interview. “The levels of stress will reduce and so there won’t be a shortage of dollars.”
Industrial production in the U.S. fell 0.1 in May as factories turned out fewer vehicles and consumer goods, the Fed said on June 15 in Washington. Economists forecast a 0.1 percent gain, according to the median estimate in a Bloomberg survey. Claims for jobless benefits rose by 6,000 to 386,000 in the week ended June 9, Labor Department figures showed the day before. Economists had projected a drop to 375,000.
The People’s Bank of China cut borrowing costs for the first time since 2008 on June 8, lowering the one-year lending rate to 6.31 percent, to counter a deepening slowdown. Brazil reduced its benchmark rate to a record 8.5 percent on May 31, and signaled it will cut more to revive growth.
The IMF said on April 17 that world growth would slow to 3.5 percent in 2012 from 3.9 percent last year.
While the dollar may appreciate to less than $1.25 per euro in the next three months, the gains probably won’t last as attention turns to the U.S. fiscal position, said Marcus Hettinger, a currency strategist at Credit Suisse Group AG.
“The risk is that the focus could shift away from Europe,” Hettinger, who’s based in Zurich and expects the dollar to end the year at current levels against the euro, said in a telephone interview on June 15. “The U.S. has a budget deficit that needs to be financed with capital inflows and U.S. interest rates are very low.”
The U.S. budget deficit will be 8.1 percent of gross domestic product this year, compared with 3.2 percent for the euro bloc, according to April projections from the Washington- based IMF. The European Central Bank’s main rate of 1 percent is 0.75 percentage point more than the upper limit of the Fed’s benchmark rate, which has been in place since December 2008.
The dollar may find support as U.S. investor appetite for foreign holdings diminishes while nations add stimulus and global growth slows. The currency has gained 2.7 percent in the past three months, which along with the pound is the biggest increase after the yen among 10 developed-market counterparts tracked by Bloomberg Correlation-Weighted Indexes. The euro slipped 1.4 percent in the period.
Brazil boosted its holdings of U.S. Treasuries 19 percent in the year through April, according to the Treasury. The nation’s finance minister spoke of a “currency war” in September 2010 as the real climbed against the greenback amid the Fed’s asset-purchase program, known as quantitative easing, or QE.
Signs of dollar scarcity are manifesting in corporate debt markets.
Henkel AG, a Dusseldorf, Germany-based maker of industrial adhesives, signed a five-year, 800 million-euro revolving credit in March that charges a 50 basis-point premium if the loan facility is drawn from in dollars, in addition to the standard 40 basis-point margin for other currencies, Bloomberg data show.
Paris-based Pernod Ricard SA (RI), the maker of Chivas Regal, would have to offer a higher interest margin borrowing in dollars on a five-year 2.5 billion-euro credit line, two people with knowledge of the transaction said on April 4. They asked not to be identified because the terms hadn’t been set.
Growth in the U.S. picked up amid the Fed’s two rounds of QE, when it bought $2.3 trillion of bonds from December 2008 to June 2011. The dollar fell against all of its 16 major peers in the period.
After expanding at a faster pace than its major peers the past two years, GDP will grow 2.2 percent this year, compared with an average 1.32 percent in the G-10, according to Bloomberg surveys of economists.
“We are bullish dollar because the U.S. economy is in OK shape, we don’t think they will do another round of QE and global risk appetite will remain muted,” Paul Robinson, London- based global head of foreign-exchange research at Barclays, said in a June 15 phone interview.
A survey of 95 global fixed income money managers from the U.K., Europe, Japan and the U.S. showed that they held the most dollars relative to benchmark indexes since the study started in May 1989, Bank of America strategists said in a June 10 report.
That’s even as a separate survey by Bank of America showed that 44 percent of respondents who do business with the bank predict the Fed will undertake a third round of QE within the next four months, up from 31 percent in May.
Weekly cumulative inflows into Treasuries last week were stronger than the five-day average over the past year, according to Bank of New York Mellon Corp. customer flow data. Fixed- income securities in Italy and Spain saw outflows, while inflows into German debt were lower than average, according to the bank.
The U.S. currency will remain a haven until the situation in Europe is sorted out, Michael Woolfolk, a senior currency strategist at Bank of New York, said in a June 13 interview, when he predicted the dollar will strengthen to $1.17 per euro in three months.
“The only chance that the dollar has for any sustained weakness, other than an occasional daily correction, is for a resolution of the Greek debt crisis,” he said.
To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at firstname.lastname@example.org; Emma Charlton in London at email@example.com; Allison Bennett in New York at firstname.lastname@example.org