Morgan Stanley Seeks Repeat of Winning Dollar Call: CurrenciesJohn Detrixhe and Morgane Lapeyre
Morgan Stanley, which advised clients to sell the dollar just before it tumbled to a four-month low in June, has rejoined U.S. currency bulls on optimism that the world’s largest economy will recover faster than peers.
Morgan Stanley forecasts that the greenback will strengthen 5 percent to $1.26 per euro and 11 percent to 107 yen by year-end, making it more optimistic than the $1.27 and 105-yen median estimates of more than 70 analysts surveyed by Bloomberg.
“The trend in the dollar is clearly to the upside,” Hans Redeker, the London-based head of global foreign-exchange strategy at Morgan Stanley, said in an Aug. 5 phone interview. “The U.S. dollar is trading according to long-term return expectations of underlying assets, and that’s highly dependent on how you view the growth differential between the U.S. and the rest of the world.”
Morgan Stanley is returning to its bullish stance just as Commodity Futures Trading Commission data show traders are paring bets that America’s currency will continue to strengthen after the Bloomberg U.S. Dollar Index rose 3.6 percent this year, heading for its biggest annual gain since 2008.
The dollar fell 0.1 percent $1.3322 per euro at 12:14 p.m. in New York, and dropped 1 percent to 96.74 yen.
The greenback has been whipsawed by mixed messages from the Federal Reserve over when it will slow the pace of the bond purchases it uses to bolster the economy. The central bank has been printing enough dollars to buy $85 billion of Treasuries and mortgage bonds a month.
Fed Chairman Ben S. Bernanke said July 10 that the U.S. central bank would maintain a “highly accommodative monetary policy for the foreseeable future.” That was after he said on June 19 that officials may start dialing down their unprecedented bond-buying program this year and end it entirely in mid-2014 if the labor market showed sustained improvement.
The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 major currencies, climbed to an almost three-year high of 1,045 in May, before falling to 1,008.6 on June 14. The gauge was at 1,022.02 today.
The turmoil spread beyond the foreign-exchange market. The Standard & Poor’s 500 Index tumbled 1.5 percent in June, the biggest monthly decline since October. The S&P GSCI Index of commodities fell to a two-month low on June 24, and bond yields soared, raising the cost of borrowing. The JPMorgan Emerging Markets Bond Index fell 5 percent in June, the most since October 2008.
“In June, we thought about the developments in asset markets and about the impact it was going to have on the way the Fed would think about its tapering policy,” Redeker said. “We thought here would be a pause in this dollar bullishness. So, basically, we implemented that pause and that worked out.”
For all the hand-wringing over Fed policy, the economy is showing signs of strength. U.S. gross domestic product will expand 2.7 percent next year, according to the median forecast of 79 economists surveyed by Bloomberg. That compares with an average estimate of 1.9 percent for the Group of 10 nations.
Equities have since bounced back, with the S&P 500 reaching a record high 1,709.67 last week, and bond market losses have slowed. A measure of U.S. fixed-income securities is little changed since the start of July, after tumbling 3.5 percent in May and June as measured by the Bank of America Merrill Lynch U.S. Broad Market Index.
“The strength in the stock market is a reflection of the U.S. recovery,” Alvin Tan, a director of foreign-exchange strategies at Societe Generale SA in London, said in an Aug. 6 phone interview. “The market is pricing in better economic conditions in the U.S.”
Futures traders decreased bets that the dollar will rally for a second week, figures from the CFTC show.
Wagers that the U.S. currency will gain versus eight peers including the euro, yen and pound -- known as net longs -- fell $4.5 billion to $23.5 billion in the week ended July 30, the least since the period ending July 2, according to CFTC data compiled by SocGen.
That compares with a high for this year of $38 billion in May, and $13.4 billion of bets that the dollar would weaken at the end of last year.
“The currency positioning of the dollar is on the net-long side, but not particularly heavy relative to recent history,” Tan said. “Monetary policy divergence will drive the euro-dollar to the low 1.20s by the first quarter of next year.”
Of 24 economists surveyed by Bloomberg, 20 predict that the dollar will rally by the end of 2013 amid signs that the U.S. is leading the developed world’s recovery from the financial crisis and that it will reduce currency-sapping stimulus more quickly.
Intercontinental Exchange Inc.’s Dollar Index, which measures the currency versus those of six U.S. trading partners, will rise to 85.6 by Dec. 31, from 81.357, according to the median estimate of 13 analysts surveyed by Bloomberg.
European Central Bank President Mario Draghi said Aug. 1 that interest rates in the euro region will remain low for an extended period. The Frankfurt-based central bank will cut its main rate by a quarter-percentage point to a record 0.25 percent early next year, SocGen’s Tan forecast.
Yields on 10-year U.S. Treasury notes, the benchmark for everything from mortgages to corporate bonds, are climbing on expectations that the Fed will pare stimulus.
While that makes U.S. investments more attractive, higher borrowing costs may stifle the economy’s recovery, weighing on the dollar. The yield touched 2.75 percent on July 8, the highest level since August 2011, and was at 2.61 percent today.
“The U.S. economy is in a more advanced position in the business cycle than Asia or Europe at the moment,” Paul Robson, a senior currency strategist at Royal Bank of Scotland Group Plc in London, said in an Aug. 6 phone interview. “The main risk is how the economy navigates higher U.S. yields,” though as more data point to a recovery, the dollar “should do reasonably well.”