Dollar Leapfrogs Forecasts in World-Beating Rally: Currencies

Frankfurt (Sept 29)  The dollar, already enjoying its best year since 2008, is showing few signs of letting up as a growing number of strategists say it’s a relative bargain amid signs the U.S. economy is gaining traction.

“The U.S. growth story is the best story out there” among the Group of 10 nations, Callum Henderson, the global head of foreign-exchange research at Standard Chartered Plc in Singapore, said by phone on Sept. 24. “The U.S. dollar remains fundamentally cheap.”

Gross domestic product in the U.S. expanded last quarter at the fastest pace since 2011, compared with little or no growth in the euro zone and Japan, where central banks are maintaining or expanding monetary stimulus. The Federal Reserve is going in the opposite direction, preparing to raise interest rates next year, a decision that would make dollar-denominated debt even more attractive to yield-starved international investors.

Against a basket of the euro, yen, pound and six other developed-nation currencies, the greenback has gained 7.4 percent this quarter and 6 percent for the year -- the best performance in the group for either period, according to data compiled by Bloomberg. Strategists are having a hard time keeping up, as the dollar is now stronger than strategists’ year-end estimates when measured against every major peer.

Rising Bets

Hedge funds and other large speculators have about the most bets on record that the dollar will keep rising, data from the Commodity Futures Trading Commission in Washington show. Net longs totaled 238,056 contracts last week, or about $35.1 billion, and approaching the record 311,052 contracts in June 2012. In July, positioning showed net bets against the dollar.

“This quarter marks the turning point in the cycle,” Paresh Upadhyaya, Boston-based director of currency strategy at Pioneer Investment Management Inc., which oversees $248 billion, said in a phone interview Sept. 25. “It really makes people ask the question: ‘is the Fed now getting ready to pivot?’”

The dollar was little changed today at $1.2689 per euro at 8:06 a.m. in London, and gained 0.2 percent to 109.55 yen. Those levels are stronger than the median year-end forecasts in Bloomberg surveys of $1.29 per euro and 107 yen. The greenback’s also trading higher than forecasts against the remainder of its 14 major counterparts.

Broad Gains

This year’s rally in the dollar has occurred almost exclusively since the start of July as Fed officials began to discuss a plan to stop expanding the money supply next month and raise interest rates in 2015. It has appreciated versus all 16 major currencies tracked by Bloomberg, ranging from a 2 percent advance against Taiwan’s dollar to an 11.4 percent surge against New Zealand’s.

The 6.5 percent gain this quarter in the Bloomberg Dollar Spot Index, which measures the performance of the greenback against a basket of 10 leading global currencies, is the biggest since the three months ended September 2008.

“We’re going through an extraordinary run here for the dollar,” Alan Ruskin, global head of Deutsche Bank AG’s G-10 currencies in New York, said in a Sept. 26 phone interview.

The dollar’s appreciation has caused Fed officials to voice concern it will have a negative impact on the economy. A too strong currency may hurt the Fed’s goal to spur growth and avoid disinflation, New York Fed President William C. Dudley said on Sept. 22.

Export Headwinds

“Of the different groups in GDP, a stronger dollar does make it more difficult for exporters,” Jennifer Vail, head of fixed income at U.S. Bank Wealth Management in Minneapolis, said in a phone interview on Sept. 24. “But so much of our GDP is domestic consumer driven, it’s the possibility of imported deflation that’s a greater concern with a strong dollar.”

The Commerce Department in Washington will say this week the monthly trade deficit held at about $40.8 billion in August, according to the median estimate of about 60 economists surveyed by Bloomberg.

GDP grew at a 4.6 percent annual rate in second quarter, and is forecast by economists surveyed by Bloomberg to expand 3 percent next year. That compares with estimates of 1.3 percent for the euro area in 2015 and 1.2 percent for Japan. At 6.1 percent the U.S. jobless rate is the lowest since 2008.

Researchers from Fed Bank of San Francisco issued a report Sept. 8 indicating investors may be underestimating the pace of monetary tightening. At their Sept. 16-17 meeting, Fed officials increased their estimate for the federal funds rate to 1.375 percent at the end of next year, versus June’s prediction of 1.125 percent.

Relative Yields

The prospect of higher benchmark rates is pushing U.S. bond yields higher, enhancing their appeal to international investors. Treasury two-year notes yield 0.64 percentage point more than similar maturity German bunds, the largest difference since 2007. The difference in 10-year notes expanded to 1.57 percentage points this month, the most since 1999.

While the Fed reduces debt purchases, below-target inflation and economic growth of less than 1 percent at an annual rate led the European Central Bank this month to begin buying certain asset-back bond bonds, adding to its stimulus package that includes a negative deposit facility interest rate.

The Bank of Japan is buying 60 trillion ($548 billion) to 70 trillion yen a year to spur inflation as the economy contracted in the second quarter.

“We certainly have this divergence story materializing in the data as well, where Europe seems to have lost momentum and the U.S. has gained momentum,” Deutsche Bank’s Ruskin said.

Source: Bloomberg