JPMorgan Cuts 2010 Dollar Forecast on Rates, Cash Stockpiles
The dollar will depreciate to 82 yen next year, JPMorgan said.
The dollar will weaken to $1.62 per euro
in the second quarter,
By Matthew Brown
Nov. 24 (Bloomberg) -- JPMorgan Chase & Co., the second- largest U.S. bank, said the dollar will fall to a record low next year on signs the Federal Reserve will keep interest rates near zero until 2011 and investors seek higher-yielding assets.
The dollar will weaken to $1.62 per euro in the second quarter, JPMorgan foreign-exchange strategists led by London- based John Normand wrote in the bank’s Global FX Outlook 2010, published today. The bank previously predicted a trough of $1.50 in the first quarter.
U.S. rates at an all-time low make the dollar attractive to sell in so-called carry trades, in which investors use the greenback to fund purchases of higher-yielding currencies such as the Australian dollar and Norwegian krone. The greenback also weakened this year as central banks increased the percentage of foreign reserves held in euros at the expense of the dollar.
“Fed policy is a key driver because it determines the dollar’s attractiveness as a funding currency and the cost of hedging the foreign-exchange risk on long-term investments,” Normand said in an interview. “The dollar’s decline is more than a carry trade. Global investors’ preference for non-U.S. equities, rising merger and acquisition outflows from the U.S. and central-bank reserve diversification are compounding the dollar’s decline.”
The dollar fell as much as 17 percent against the euro since rising to a more than three-month high on March 4. It was little changed today at $1.4944 per euro as of 11:16 a.m. in London. The U.S. currency weakened to an all-time low of $1.6038 per euro in July 2008.
Second-Half Rally
The U.S. currency will rally between 5 percent and 10 percent in the second half of 2010 as the Fed begins to withdraw the extraordinary monetary-policy tools it used to drag the U.S. economy out of the worst recession since World War II, Normand said.
The carry trade will earn investors 7 percent in 2010, compared with 20 percent this year, Normand wrote in the note. A strategy called the forward carry trade, where investors buy currencies with rising yields regardless of their level, will produce returns of about 6 percent, he said.
The traditional carry trade will be disrupted by currency volatility as the Fed ends non-conventional measures designed to support the economy, Normand said.
“Since the carry trade should be considerably larger by the time the Fed takes its initial steps, the risk of a carry- trade unwind mid year is considerable,” he said. “Since the Fed will not lift rates until 2011, high-yield currencies will recover and generate positive returns for the year.”
Money Markets
The U.S. currency will also weaken as investors move money out of dollar-denominated money-market funds, where they stored cash at the height of the financial crisis, Normand said.
“Dollar selling this year has been substantial, but has not fully unwound crisis-related dollar buying,” he wrote in the report. “Another $300 billion in drawdowns could occur, with the dollar still the chief casualty.”
Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June, Barclays Plc data showed. That’s the highest percentage in any quarter with more than an $80 billion increase.
Swiss Franc
“Central banks remain significant buyers of dollars, but there is mounting evidence that they are hedging their bets,” Normand wrote. The difference between the $50 billion-per-month of net official purchases of U.S. securities and the $100 billion-per-month of emerging-market reserve accumulation suggest record diversification, he said.
The dollar will depreciate to 82 yen next year, JPMorgan said.
The bank previously forecast dollar-yen no weaker than 91 in 2010.
The pound will climb to a peak of $1.74 in 2010, before dropping to $1.67 in December, according to the report. The strategists had earlier seen the British currency rising no higher than $1.60.
The Australian dollar will reach parity with the dollar for the first time since 1982, reaching $1.02 by June before falling back by December. The euro will drop to 1.45 Swiss francs in 2010, from an earlier prediction of 1.53 francs per euro.
To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net
Last Updated: November 24, 2009 08:02 EST
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