Structured Notes Tied to Currencies Fall on Stronger Dollar

Sales of structured notes that bet on a weakening U.S. dollar have stalled after the busiest first quarter since 2010 on concern that reduced Federal Reserve stimulus may strengthen the currency.

Investors have bought $3.36 million of the securities in August after purchasing $3.95 million of them in July, the slowest month since at least January 2010, when Bloomberg started collecting comprehensive data on the securities. Banks sold $339.8 million of notes tied to currencies in the first three months of this year, 67 percent of the 2013 total.

The dollar has appreciated against other currencies as investors are concerned that global economic growth will slow and that the Fed will start to cut back on asset purchases, said Michael Woolfolk, a global-markets strategist at Bank of New York Mellon Corp. in New York. The Bloomberg U.S. Dollar Index, which tracks the dollar against 10 other currencies, rose to a three-year high of 1,054.41 on July 5.

“Evidence suggests that as the year’s gone on, the Fed’s become less enamored with monetary easing,” which has led to a stronger dollar, Woolfolk said in a telephone interview.

The Fed may begin trimming asset purchases later this year and end them around mid-2014 if the economy improves in line with officials’ expectations, Chairman Ben S. Bernanke said June 19. The bond buying, which puts downward pressure on borrowing costs, tends to weigh on the currency.

The Bloomberg U.S. Dollar Index jumped 1.1 percent on the day of his remarks and gained 3.3 percent in two weeks.

Peso Notes

About 80 percent of U.S. currency-linked structured notes sold this year, for offerings greater than $1 million, are tied other currencies’ performance against the dollar and become more valuable when it weakens, Bloomberg data show.

The most popular notes were tied to the value of the Mexican peso against the U.S. dollar, according to Bloomberg data. Banks sold $131 million of the securities this year. That’s still 6.6 percent less than the $140.2 million issued last year during the same period, when sales of notes betting on the Mexican currency to appreciate surged as labor costs in the country fell.

Investors bought $84.3 million of notes tied to the Chinese yuan through March on bets that the country was recovering from an economic slowdown, Bloomberg data show. Since then, banks haven’t sold any, as China’s economy grew 7.5 percent from a year earlier in the April-June period, slowing for a second straight quarter.

Largest Offering

Deutsche Bank AG had the largest currency-tied offering this year with $45.6 million of one-year notes tied to an equally weighted basket of the Mexican peso, the Polish zloty, the Indonesian rupiah and the Korean won. The securities, issued Feb. 1, yield 180.5 percent of the gains of the basket with 10 percent of capital at risk, according to a prospectus filed with the U.S. Securities and Exchange Commission.

The notes, which JPMorgan Chase & Co. distributed for a 1 percent fee, last traded on Aug. 5 for 93.7 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Amanda Williams, a spokeswoman for Deutsche Bank in New York, declined to comment on the securities.

Banks create structured notes by packaging debt with derivatives to offer customized bets to retail investors while earning fees and raising money. Derivatives are contracts whose value is derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

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