Dollar Bottom Detected in Biggest Flows Since 2009: Currencies

The dollar, after falling to its lowest levels since February against major peers, is attracting the biggest wagers by money managers in almost five years on signs the U.S. economy is gathering pace.

Pension funds and institutions bought the most dollar-denominated assets in late October since at least January 2009, according to Bank of America Corp. data that don’t cite actual volumes, as the Bloomberg U.S. Dollar Index fell more than 5 percent from its high for the year in July. The purchases were mainly against the pound and euro.

Growth in the U.S. will accelerate in every quarter of 2014, starting at 2.6 percent and building to 3 percent, while in the Group of 10 overall it’s forecast to be about 2 percent for most of the year, Bloomberg surveys of economists show. A stronger economy may keep U.S. inflation levels higher than in other major nations, allowing the Federal Reserve to lead the world in reducing monetary stimulus that has weighed on the greenback, according to Bank of America and Societe Generale SA.

“The fundamentals story, as far as the dollar’s concerned, remains very strong,” David Woo, the global head of rates and currencies at Bank of America in New York, said in a Nov. 1 phone interview. “The biggest story in financial markets in 2014 will be about inflation, particularly about inflation divergence,” and “there’s no question that” the U.S. is “going to be the first one to tighten policy,” he said.

Fed Delay

Since falling to 997.94 on Oct. 23, the Bloomberg Dollar Index has jumped 1.8 percent to 1,015.99 at 4:20 p.m. in New York. The gauge, which measures the greenback against the euro, yen, pound and seven other currencies, has ranged this year from as low as 984.07 in January to 1,056.33 in July.

While the Fed decided last week to wait for the economy to improve further before cutting its $85 billion of monthly bond purchases, Bank of America says it’s watching inflation for signs of when growth may overhaul peers. Deutsche Bank AG, the biggest currency trader, says tapering may start next month.

The widest gap between annual consumer-price inflation in the U.S. and the 17-nation euro region this year is prompting investors to demand higher yields to own Treasuries rather than German bunds, boosting the appeal of the dollar. Inflation eats into the fixed-rate coupons paid by bonds.

Two-year U.S. government notes yield 0.3 percent, 17 basis points, or 0.17 percentage point, more than German securities, data compiled by Bloomberg show.

Slowing Inflation

Annual consumer-price inflation in the U.S. slowed to 1.2 percent in September, in line with the estimate of 44 analysts surveyed by Bloomberg and down from 1.5 percent the previous month, the Labor Department in Washington said Oct. 30. The following day, the European Union’s statistics office estimated the pace of euro-area price gains eased to an almost four-year low of 0.7 percent in October, from 1.1 percent the prior month.

Inflation is a useful measure of how well an economy is recovering, said Sebastien Galy, a senior foreign-exchange strategist at SocGen in New York.

“It’s like you’re aquaplaning with your car,” Galy said. “Until you reach the friction point, the car isn’t heating up. That’s what’s happening in the EU and U.S.”

Euro, Pound

The dollar has strengthened to $1.3453 per euro from $1.3832 on Oct. 25, which was the weakest level since November 2011. It has also gained versus the pound, reaching $1.6058 from $1.6257 on Oct. 23.

Banks from Credit Suisse Group AG to Westpac Banking Corp. lowered their forecasts for the U.S. currency versus its major peers last month amid a 16-day government shutdown and a dispute over raising the nation’s borrowing limit.

With the fiscal crisis now resolved, the door is open for the dollar to build on its rally, according to Alan Ruskin, Deutsche Bank’s global head of Group-of-10 foreign exchange.

“The economy will remain pretty resilient to the fiscal drag and the distortion of the government shutdown,” New York-based Ruskin said in a Nov. 1 e-mail.

When the Fed maintained the pace of its bond purchases on Oct. 30, policy makers said they needed to assess the economy after last month’s jitters. The odds of the central bank paring stimulus in January rose to 45 percent, from 25 percent before last week’s statement, Citigroup said.

ECB Rates

Speculation that the European Central Bank will keep its main interest rate at the record-low 0.5 percent it has maintained since May would probably reverse the dollar’s gains, said Greg Anderson, the head of global foreign-exchange strategy at Bank of Montreal in New York. The ECB meets Nov. 7.

“I’m not sure if the ECB will do anything now, because the pressure was already taken off” since the euro weakened, Anderson said in a Nov. 1 phone interview. “If the euro was at $1.39 when the ECB meets, they would’ve cut.”

While growth and jobs data in the U.S. this week “could put a December taper back on the table, it will only raise the odds from 10, to 20 or 30 percent,” Anderson said in reference to the Fed. Bank of Montreal sees the dollar weakening to $1.39 per euro by year-end, compared with a median estimate of $1.33 in a Bloomberg survey of about 80 analysts.

Gross domestic product growth in the world’s largest economy slowed to an annualized 2 percent in the third quarter, from 2.5 percent in the previous period, economists surveyed by Bloomberg said before a Commerce Department report on Nov. 7. The jobless rate rose to 7.3 percent in October from 7.2 percent the prior month, according to a separate survey before a Labor Department report the following day.

Fund Flows

Bank of America’s index tracking proprietary data on investor sales and purchases fell to a reading of 0.1 last week, from 0.7 in the period ending Oct. 25, which was the highest since the U.S. lender started compiling the data in 2009.

The week before that, what are known as real-money investors, including pension funds, real-estate investment trusts and insurance and asset-management companies, had net outflows of dollar-denominated assets, the data show.

Options traders are the most bullish on the dollar versus the euro since Oct. 11, according to 25-delta risk reversal rates compiled by Bloomberg. The premium on three-month options giving the right to sell the euro against the greenback, compared with those allowing for purchases, increased to 0.78 percentage points, from a nine-month low of 0.36 on Oct. 28.

“Air is leaking out of Treasuries and the euro,” said Deutsche Bank’s Ruskin. That’s “going to keep the dollar momentum positive,” he said.

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