Weak Dollar Illusory as Correlated Trade Shows Gains (Update2)
Feb. 8 (Bloomberg) -- For all the concern over the $1.6
trillion U.S. budget deficit and record debt load, the dollar is
as valuable now as 35 years ago.
Measured against a basket of currencies from the Group of
10 nations proportioned by how they trade against each other,
the greenback is up about 3 percent since 1975, according to
Bloomberg Correlation-Weighted Currency Indexes. That was four
years after the Bretton Woods agreement, set up in 1944 to link
currencies to the price of gold, collapsed. The U.K. pound has
dropped 34 percent and the Canadian dollar has fallen 6 percent.
The U.S. dollar
gained 6 percent since November after
losing 12 percent in the first 11 months of 2009 as measured by
the Bloomberg index.
Barclays Capital and Morgan Stanley say the
U.S. will grow faster than the rest of the developed world this
year and 2011. At the same time, Europe faces worsening finances
in Greece, Spain and Portugal, Japan’s economy is struggling and
concerns about valuations in emerging markets are increasing.
“To quote
Mark Twain, the reports of the dollar’s demise
have been greatly exaggerated,” said
Win Thin, a senior
currency strategist in New York at Brown Brothers Harriman &
Co., which manages about $40 billion in assets.
Rising Demand
Nowhere is that more evident than in the market for U.S.
Treasuries. The amount of America’s government debt held by
investors outside the U.S. rose 17 percent to $3.6 trillion in
2009 through November, according to the Treasury Department.
Purchases may continue to rise as investors seek refuge
from growing sovereign credit risk in the euro area. The dollar
“will benefit from relative liquidity of the U.S. Treasury
markets,” Barclays Capital currency strategists led by
David
Woo in London said in a Feb. 5 report.
Barclays Capital economists said in a report the same day
that U.S. gross domestic product may grow 3.6 percent this year,
versus 2.5 percent for the developed world, and 3.1 percent in
2011, compared with 2.6 percent elsewhere. Japan’s GDP may
expand 1.9 percent this year, and the euro zone 1.3 percent,
they said.
A day earlier, strategists at New York-based Morgan Stanley
boosted their dollar forecast, saying it will strengthen to
$1.24 per euro by year-end from its previous estimate of $1.32.
It traded at $1.3676 as of 6:46 a.m. in New York today. The firm
sees the U.S. currency gaining to 109 yen from 89.42 today, and
rallying to $1.49 to the pound from $1.5578
Reserve Currency
Investors and traders predicted last year the dollar would
lose its position as the world’s reserve currency, which means
it’s the first place central banks look to park their cash.
“With all the concerns about the problems with the U.S.
financial system last year, the banking sector in the euro zone
looked a bit more stable,” said
Robert Sinche, chief strategist
at Lily Pond Capital Management LLC in New York. “That created
a sense of the euro as an alternative to the dollar.”
Central banks that disclose breakdowns of their reserves
bought a record $60 billion worth of euros in 2009’s second
quarter, more than half of their new cash in the period, based
on International Monetary Fund data adjusted for exchange-rate
changes using methodology developed by Barclays Capital.
They then reversed course, putting 15 percent of new
reserves, or $17.8 billion, into euros in the third quarter, the
smallest share of any period in which their reserves grew since
early 2008. Central banks put 45 percent, or $52 billion, into
dollars, up from 36 percent.
Rally by Default
Rather than a referendum on the U.S., the dollar may be
rallying by default.
Nouriel Roubini, the New York University
professor who predicted the credit crisis, said on Feb. 4 that
the greenback may weaken for the next three years.
Moody’s Investors Service said last week the U.S.
government’s Aaa bond rating will come under pressure unless
additional measures are taken to reduce budget deficits
projected for the next decade. The ratio of government debt to
GDP and revenue increased “sharply” during the seizure in
credit markets and recession, Moody’s said.
“If the current upward trend in government debt were to
continue and become irreversible, the rating could come under
downward pressure,” said analysts led by
Steven Hess, a senior
credit officer at Moody’s in New York.
The Obama administration’s plan to offset spending by more
than $1.2 trillion over 10 years showed larger deficits and
higher debt
levels than in the original budget, Moody’s said.
The ratio of debt to GDP in the U.S. will continue to expand,
reaching 76.5 percent in 2019 compared with an earlier forecast
of 70.1 percent, Moody’s said.
Treasury Secretary Timothy F. Geithner said in an ABC News
interview broadcast yesterday the U.S. isn’t in danger of losing
its Aaa rating.
“Absolutely not,” Geithner said, when asked whether a
downgrade is a concern. “That will never happen to this
country.”
‘A Better Bet’
The U.S. Office of Management & Budget said America’s
budget deficit will fall each year through 2014, to $706 billion
from $1.56 trillion in 2010, as borrowing needs drop to $814
billion from $1.75 trillion.
“Under stress, people trust the U.S. to do the right
thing,” said
Sebastien Galy, a currency strategist at BNP
Paribas SA in New York. “The U.S. is a better bet.”
A global reserve currency must provide investors with the
ability to invest, which requires liquid markets, and few
capital controls, according to investors. China’s yuan can’t
replace the dollar because it isn’t fully convertible and
doesn’t float freely. The euro region and the markets for
commodity currencies, such as the Australian, New Zealand and
Canadian dollar, don’t have enough trading to absorb the amount
of cash the reserve banks hold.
‘No Alternative’
“There is no alternative to the dollar, so it’s status as
a reserve currency can’t be under threat,” said
Adam Boyton, a
senior foreign-exchange strategist at Deutsche Bank AG in New
York.
The dollar’s preeminence will remain intact, as it
continues to be the most widely used currency in business and
finance worldwide, the Federal Reserve Bank of New York said in
a report released Jan. 5. Some $580 billion in banknotes, or 65
percent of all bills in circulation, were held outside the U.S.
as of March 2009, according to Fed data.
The greenback has an 86 percent share of the foreign-
exchange market, more than twice the euro’s 37 percent. Its
share of the international debt market is 39 percent.
“The international role of the dollar remains substantial
a decade after the introduction of the euro, and despite changes
in the value of the dollar and the financial turmoil that began
in 2007,”
Linda Goldberg, a vice president at the New York Fed,
wrote in the report.
Relative Deficits
While the Congressional Budget Office expects America’s
debt to reach 65 percent of GDP in 2010, that would still be
below the 77 percent of GDP the European Commission expects for
Germany, the U.K.’s 80 percent and Japan’s 180 percent.
“I would want to stay away from the euro, the euro zone
and some of the emerging European currencies,”
Michael Gomez,
the co-head of emerging markets at Pacific Investment Management
Co., said on Feb. 4 at a conference in Moscow. The Newport
Beach, California-based firm manages the world’s biggest bond
fund.
At their meeting this weekend in Iqaluit, Canada, Group of
Seven finance ministers pledged to press ahead with economic
stimulus measures. Canadian Finance Minister
Jim Flaherty told
reporters that “we need to continue to deliver the stimulus to
which we are mutually committed and begin looking at exit
strategies to move to a more sustainable fiscal track.”
Yen Gains
Rather than using a weighted average of exchange rates
based on trade data, which is reported on lag and subject to
revision, the Bloomberg Correlation-Weighted Currency Indexes
calculate weights based on variances in exchange rates.
The indexes have a start date of Jan. 2, 1975, and a base
value of 100. The
index for the dollar was little changed at
102.69 today and the
yen index was at 395.70. The
Swiss francindex was at 271.20 and the euro index was at 107.60, from
271.23 and 107.58 on Feb. 5 respectively. The index for the euro
replicates the German deutsche mark before 1999, when Europe’s
common currency started trading.
The
New Zealand dollar index fell 0.2 percent to 50.14
today, the
Swedish krona index climbed 0.1 percent to 52.89 and
the
Australia dollar index dropped 0.2 percent to 64.07.
Though the dollar is the world’s reserve currency, it
doesn’t affect the movement of foreign-exchange rates as much as
the euro, the indexes show. Since the euro’s creation, its
correlation to other G-10 currencies has steadily risen,
overtaking the dollar in 2004 and all others by December 2008.