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Central Banks Gorge on Dollars, Englander Sees Fall (Update2)
By Liz Capo McCormick
March 16 (Bloomberg) -- For the first time since 2001, foreign governments and private investors are both pouring money into dollars, a sign to Steven Englander that the U.S. currency is peaking.
Englander, Barclays Capital Inc.’s chief U.S. currency strategist, estimates foreign purchases of American assets have reached record levels, with individuals buying $133 billion a month on average since November, based on government statistics. Central banks were net buyers of Treasuries for 29 of the past 30 weeks, a streak unmatched since at least January 1983, data compiled by Bloomberg show.
While the dollar strengthened 24 percent against the euro since falling to a record on July 15 as investors sought the safety of U.S. assets, zero percent interest rates and signs the financial crisis is abating will help lead to a 13 percent drop in the next year, Englander said. He’s not alone. JPMorgan Chase & Co. warns the dollar trade is becoming “crowded.” Half of 50 currency strategists surveyed by Bloomberg News predict the dollar will fall against the euro by Dec. 31.
“People are sitting there holding massive amounts of zero- yielding dollar assets,” said Englander, a Yale University Ph.D. who started his career at the Federal Reserve Bank of New York and studied the currency markets for 25 years. “If there is any sort of good news, demand for dollars can drop off very, very quickly.”
Historical Precedence
The last time Englander’s calculations showed the public and private sectors both betting the dollar would rise was during the March-to-November 2001 U.S. recession. Back then, investors had flocked to the dollar on expectations of a recovery. It hit a 15- year high that July and then slid 8 percent in the next two months against Intercontinental Exchange Inc.’s Dollar Index, a basket of the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona.
This year, that gauge has surged 12.2 percent, reaching 89.624 on March 4, the highest since April 2006, as investors sought a haven from the worst financial crisis since the 1930s. It ended last week at 87.428, down 1.22 percent, and traded at 86.638 at 7:17 a.m. in New York.
The dollar’s climb intensified in the two months following the September collapse of Lehman Brothers Holdings Inc., which deepened the global credit freeze and prompted investors to flee higher-risk investments.
Bank Rebound
Last week showed how good news in financial markets may be bad for the dollar.
On March 10, New York-based Citigroup Inc. said the bank is having its best quarter since 2007. Then JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told CNBC that the New York- based company was profitable in January and February. Two days later, Bank of America Corp. CEO Kenneth Lewis said his Charlotte, North Carolina-based bank was also profitable in the year’s first two months.
The MSCI World Index of stocks in 23 developed economies rallied 8.5 percent in the best week since November, and the dollar fell 2.1 percent against the euro to $1.2928. The weekly decline was the steepest since December.
Englander predicts the dollar will slide to $1.45 per euro. He bases his conclusions on data that includes trading by clients with $1.4 trillion under management at Barclays Global Investors, the asset management unit of London-based Barclays Plc. He also looks at Treasury Department statistics on the flow of capital into and out of the U.S.
Foreign Purchases
Foreign buying of American financial assets by both private investors and governments averaged $141 billion from September to December, Treasury data show. Shorter-term securities made up more than half of the international purchases in December. Demand was so strong that, for the first time, investors accepted rates below 0 percent on three-month Treasury bills to safeguard their capital. The rate has rebounded to 0.2 percent.
Trading on foreign-exchange futures contracts shows investors are bullish on dollars.
Hedge funds and other large speculators have about 60,000 more bets that the dollar will rise against nine other industrialized nations’ currencies than wagers it will fall, Commodity Futures Trading Commission data show. In September, when Lehman went bankrupt, those bets peaked for the year at about 140,000 contracts, CFTC data tracked by JPMorgan show.
Buying Streak
Central banks’ almost uninterrupted 30-week streak of net buying Treasuries left them with $1.78 trillion worth on deposit at the Federal Reserve as of March 11, up $36 billion since Aug. 13. Central bank holdings of all publicly traded securities at the Fed increased in 12 of the past 13 weeks, to $2.591 trillion.
Greg Gibbs, director of foreign-exchange strategy in Sydney at Royal Bank of Scotland Group Plc, disagrees with Englander.
“Yes, the market is generally long the U.S. dollar against most major currencies as per the futures position data,” but it’s not excessive, said Gibbs, who has analyzed currency trends for more than two decades. “It is inaccurate to characterize the market as being structurally long the U.S. dollar. For many central banks, such as that in Russia, reserves are falling. We’re looking for another significant fall in the euro versus the dollar as the European economy is really struggling.”
The median forecast of 50 strategists surveyed by Bloomberg is for the dollar to fall to $1.30 per euro by March 31 and end the year at $1.29, about where it ended last week. The euro traded at $1.3034 at 7:17 a.m. in New York.
The euro climbed against the dollar for a fifth day as stock markets rose and after policymakers from the Group of 20 nations said they would double the International Monetary Fund’s resources. Finance chiefs pledged a “sustained effort” to end the global recession and to cleanse banks of toxic assets.
‘Tipping Point’
“Long the U.S. dollar is becoming a crowded trade,” said John Normand, head of global currency strategy in London at JPMorgan Chase & Co., in an interview March 12. “The key question is when a safe-haven currency loses its appeal. The tipping point will be when the U.S. looks like a worse investment environment relative to other countries or if the situation in Europe stabilizes,” which is likely to be soon, he said.
JPMorgan forecasts the dollar will slide about six percent versus the euro by the end of the year, to $1.37.
The sudden decline of the Japanese yen as a refuge shows how quickly sentiment can change, Normand said.
In 2008, the yen rose the most of the 171 currencies tracked by Bloomberg, climbing 23 percent versus the dollar and 29 percent against the euro, as credit markets froze, equity markets collapsed and global economic growth stalled. The yen hit 87.13 per dollar on Jan. 21, its strongest since July 1995.
Inflation Threat
Then, Japan’s economy contracted last quarter by the most in more than three decades and its trade deficit reached the widest in more than two decades in January as exports plunged 46 percent. The yen has plummeted 11 percent since that January peak.
Maxime Tessier, head of foreign exchange in Montreal at Caisse de Depot et Placement du Quebec -- Canada’s largest pension fund, with C$120.1 billion ($94.3 billion) in assets -- said a primary catalyst for a slide in the dollar will be an escalating threat of rising prices sparked by Fed purchases of Treasuries. Faster inflation hurts the value of a currency as it erodes the value of future returns in that denomination.
Fed Chairman Ben S. Bernanke said Dec. 1 that the central bank may buy longer-term U.S. debt to keep yields and interest rates down. On March 6, Federal Reserve Bank of New York President William Dudley said policy makers have decided for now not to expand the range of securities they purchase.
‘Aggressive Reflation’
The Fed lowered its target rate for overnight loans to zero to 0.25 percent and more than doubled the assets on its balance sheet to $1.9 trillion during the past year, expanding bank reserves and beginning lending programs to bolster the financial system. President Barack Obama is seeking Congressional approval for a $3.55 trillion budget for the year starting in October that would increase spending by 32 percent to kick start the economy.
“The Fed has a policy of very, very aggressive re- flation,” Tessier said. “A weaker dollar goes in the right direction, from a U.S. standpoint, as it stimulates economic growth. The trading strategy over 2009 is to gradually build up a short U.S. dollar position.” |
