BL: Dollar to Be `Growth Currency' as Economy Outpaces Europe, Japan, UBS Says
By Anchalee Worrachate
May 24 (Bloomberg) -- The dollar will probably become a “growth currency” during the next 10 years, shedding its haven status of the past decade, as the U.S. economy outperforms Europe and Japan, according to UBS AG.
The dollar will return to a pattern seen in the early 1980s and late 1990s, when it appreciated as stocks rose, Mansoor Mohi-uddin, global head of foreign-exchange strategy at UBS in Singapore, wrote today in a research report titled “FX Mega- Trends 2010-2020: Dollar Regime Change.” Central banks may intervene more frequently in currency markets as price swings, or volatility, intensify, he said in separate reports.
The greenback has risen 9.7 percent this year, Bloomberg Correlation-Weighted Currency Indexes show, amid evidence the U.S. economic recovery is gathering pace. The Federal Reserve will be the first major central bank to boost interest rates, Mohi-uddin wrote. Further dollar strength may be underpinned by U.S. money managers, foreign central banks and sovereign wealth funds, he said.
“Over the next 10 years it seems likely that the dollar will shift to having a positive relationship with investor sentiment as America’s fundamentals appear more attractive than those of the euro zone, U.K. and Japan,” Mohi-uddin wrote. “The likelihood that the dollar performs strongly rather than weakly when investors are risk-seeking will signify a major change in the currency markets.”
The dollar strengthened to $1.2384 as of 11:17 a.m. in London, from $1.2570 on May 21.
Economic Outperformance
The U.S. economy will expand 3.2 percent this year, according to the median estimate of 77 analyst forecasts compiled by Bloomberg News. That compares with 1.2 percent growth for the U.K., 1.1 percent in the 16-nation euro region and 2.1 percent for Japan, separate surveys show. U.S. equities led gains through the end of April, “until all markets were hit by risk aversion this month,” Mohi-uddin said.
Fed policy makers will raise their benchmark rate to 0.5 percent from a range of zero to 0.25 by December, while the ECB will hold its main rate at 1 percent and the Bank of Japan will stay at 0.1 percent through year-end, according to median forecasts of economists compiled by Bloomberg. The Bank of England will also increase its key rate by the fourth quarter, according to another median forecast.
“The euro zone has been stricken by crisis over the debts of its weaker members,” Mohi-uddin said. “Japan will only emerge slowly from deflation and the U.K. has to deal with its record high budget deficit over the next few years.”
Change in Trend
For the past decade, the dollar, which slid 28 percent against the euro and 16 percent versus the yen, was a refuge amid low interest rates, rising when investors were risk-averse and falling when equities, credit and commodities rose, according to Mohi-uddin.
“Thus when U.S. investors were risk-seeking and sought higher yields, they would often buy higher-returning foreign assets,” he wrote. Now the dollar has strengthened even as stocks rallied, a change from the general trend of the past decade, Mohi-uddin said.
Sovereign-wealth funds, particularly those of oil-producing nations, may also start to view the dollar more favorably amid U.S. economic outperformance, according to the report.
‘Highly Volatile’
“This would cause the dollar to rise, not fall, if oil prices strengthen in the next few years,” he wrote.
The foreign-exchange market will become more volatile in the next decade, raising risks policy makers will increase intervention, said UBS, the world’s second-biggest currency trader, according to Euromoney Institutional Investor Plc. Volatility surged in the wake of the collapse of Lehman Brothers Holdings Inc. in September 2008 before receding last year, according to data compiled by Bloomberg.
“In 2010 exchange rates have again become highly volatile as the European debt crisis has unfolded,” Mohi-uddin said. “The combination of rising emerging markets, crisis in other regions and unpredictable shifts in economic policies will keep currency markets very volatile over the next decade.”
The ECB may face “much greater” pressure to intervene, he said. The euro dropped against all 16 most-actively traded counterparts this year as the region’s debt crisis deepened. The risk of policy makers taking action will increase should the euro weaken below its long-term fair value of $1.20, he said.
The last coordinated intervention by the Fed, the ECB, the Bank of Japan and central banks in the U.K. and Canada was in September 2000, when they supported the euro after the common currency fell to 86 U.S. cents.
Investors should be cautious should policy makers say the currency market isn’t reflecting fundamentals or that trading has become disorderly, Mohi-uddin said.
“These circumstances are likely to prevail as Europe’s debt crisis endures over the next few years,” he said. “There may be several episodes of either unilateral or coordinated intervention by the ECB in 2010-2020.”
To contact the reporters on this story:
Anchalee Worrachate in London at
aworrachate@bloomberg.net.
Last Updated: May 24, 2010 06:41 EDT
