US dollar is 2013's best performer in foreign-exchange markets, is poised to strengthen amid improving US growth, additional European, Japan monetary easing, strife in emerging markets

, July 8, 2013 () – The dollar, this year’s best- performer in foreign-exchange markets, is poised to strengthen as the combination of improving U.S. growth, more monetary easing from Europe to Japan and violent protests in emerging markets signal new heights for the world’s reserve currency. The U.S. Dollar Index surged today to its highest level since July 2010, breaching key technical levels that indicate the measure of the currency against six trading partners may appreciate another 5 percent. Options traders are betting that 29 of 31 major currencies tracked by Bloomberg will fall this year versus the dollar.

“The dollar is in the sweet spot,” David Bloom, the global head of currency strategy at HSBC Holdings Plc in London, said in a July 5 phone interview. “The dollar will continue to make a clean sweep, powering ahead over all other currencies.”

While the greenback’s gain may hamper President Barack Obama’s efforts to boost exports, it’s a signal the U.S. economy is on track after the Labor Department said employment increased more than forecast in June. That’s boosting speculation the Federal Reserve will taper its asset purchases, underpinning the currency just as the European Central Bank and Bank of England pledge to keep interest rates low, China risks missing economic targets and India and Japan struggle to stoke growth.

The IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, added 0.1 percent to 84.549 as of 1:34 p.m. in Tokyo after earlier touching 84.588, the highest since July 2010.

It gained 1.5 percent to 84.449 on July 5, the biggest jump since November 2011. The index briefly broke above what’s known as a technical-resistance level of 84.5, and is on course to reach highs not seen since June 2010, when it touched 88.71, according to Bank of New York Mellon Corp.


Risk Reversals


Over the past three months, the dollar has proved the best among a basket of 10 currencies, gaining 5.6 percent, according to Bloomberg Correlation-Weighted Indexes. For this year, it appreciated 8.2 percent. Option risk-reversal rates signal traders favor the dollar over most major currencies besides the Hong Kong dollar and the Japanese yen between now and October.

U.S. employers added 195,000 workers for the second month in a row in June and wages increased as the world’s largest economy gained momentum, fueling speculation the Fed may begin phasing out its $85 billion in monthly debt purchases as soon as September. The U.S. jobless rate held close to a four-year low in June at 7.6 percent.


Currency King


While the Fed considers phasing out bond buying, the Bank of England and European Central Bank signaled that they will maintain record low borrowing costs. In Asia, the Bank of Japan is on course to double the monetary base through its own quantitative-easing measures. China’s growth is forecast to slow to 7.6 percent next year from 7.7 percent in 2013, according to a separate Bloomberg survey.

“The dollar is king,” said Neil Mellor, a currency strategist at Bank of New York Mellon in London. The Dollar Index “could go significantly higher. The next thing technically is the highs we had from 2010. That’s very, very feasible particularly when you think that the U.S. economy is in a lot better shape than it has been since the crisis.”

The dollar gained 0.1 percent to $1.2817 per euro after touching $1.2806 on July 5, its strongest level since May 17. The greenback added 0.1 percent to 101.26 yen after earlier reaching 101.53, the highest since May 30.


Revised Forecasts


The U.S. central bank will probably taper its monthly Treasury and mortgage-backed debt buying in 2013 and halt purchases around mid-2014 as long as the economy meets Fed projections, Bernanke said June 19 after a two-day meeting of the Federal Open Market Committee.

Economists at JPMorgan Chase & Co. and Goldman Sachs Group Inc. said the Fed will probably begin to scale back purchases in September, not December as they had predicted earlier, according to notes on July 5.

The chances that the central bank will raise its target rate for overnight loans between banks in December 2014 rose to 57 percent from 15.9 percent two months ago, according to Fed fund futures. The target rate has remained in a range of zero to 0.25 percent since December 2008.

The shift in market expectations for a rise in the Fed’s target rate, which Bernanke said on June 19 is “far in the future,” may challenge dollar bulls in the short term if policy makers damp speculation, according to Valentin Marinov, the London-based head of European Group of 10 currency strategy at Citigroup Inc.


‘Not Tightening’


Policy makers have said they will keep the rate at almost zero as long as unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.

“There may be some scope for dovishness from the Fed because they want to lean against that backup in short-term yields,” Marinov said in a July 5 telephone interview. “The Fed chairman would be quite explicit in highlighting that tapering is not tightening.”

The mandatory $85 billion in across-the-board government budget cuts, known as sequestration, that began on March 1 will constrict U.S. growth. The Congressional Budget Office has estimated those reductions alone will decrease gross domestic product this year by 0.6 percentage point.


Growth Comparisons


The U.S. will expand 1.9 percent this year and 2.7 percent in 2014, according to the median forecasts in Bloomberg surveys. Europe will contract 0.6 percent in 2013 before growing 1 percent next year, a separate survey shows.

“We’re in the early stages of what’s probably a three-, four-year uptrend in the dollar that’s probably 10-15 percent on average across the rest of the major currencies,” said Kit Juckes, a global strategist at Societe Generale SA in London, during a telephone interview on July 5. “It’s starting slowly but I think it’s real.”

Political and social unrest around the globe has added to demand for the U.S. currency.

Approval ratings of Brazilian President Dilma Rousseff have fallen as local shares and the nation’s currency slid over the past three weeks amid protests and demands for better public services. The real has slumped 8.9 percent this year.


Rupee Tumbles


The rupee tumbled to a record versus the dollar today and fell 4.9 percent in June, among the most of the currencies tracked by Bloomberg, as global funds cut holdings of Indian debt and equities by $7.1 billion. The forced Reserve Bank of India Governor Duvvuri Subbarao to refrain from adding to three interest-rate cuts that helped push the benchmark 10-year yield to a 3 1/2-year low in May.

Italy, Europe’s fourth-biggest economy, is poised to contract 1.8 percent this year, according to the Organization for Economic Cooperation and Development.

Portugal’s bonds slumped last week, pushing 10-year yields above 8 percent for the first time since November, on concern the resignation of two ministers will derail the government’s attempts to implement austerity measures.

China suspended the release of industry-specific data last week from a monthly survey of manufacturing purchasing managers, with an official saying there’s limited time to analyze the large volume of responses. The disappearance of data on industries including steel adds to issues hampering analysis of the world’s second-biggest economy, after fake invoices inflated trade numbers this year.


Currency Supertanker


The Australian dollar is trading near its lowest since September 2010 as traders added to bets that the central bank will cut interest rates. The Aussie has dropped more than 11 percent since the Reserve Bank of Australia unexpectedly cut its key rate on May 7. The RBA decided to use “some” of its available scope to reduce borrowing costs, Stevens said after his first cut this year.

Treasuries offer the highest real yields in more than two years, with the 10-year note at 2.69 percent and the Fed’s favored inflation gauge at 1 percent. At the same time, 10-year German bunds yield 1.72 percent and comparable maturity Japanese government debt returned 0.88 percent.

“Real U.S. yields are significantly improving and that is normally a very, very strong historical indicator of future dollar strength,” said Peter Kinsella, a senior currency strategist at Commerzbank AG in London, during a telephone interview on July 5.

“What we are starting to see now is a period of what is going to be sustained and very, very consistent dollar strength,” Kinsella said. “The dollar makes up about 61 to 62 percent of global foreign-exchange reserves, it’s involved in about 75 to 80 percent of all currency transactions, so when the dollar moves it’s a bit like when a supertanker moves -- it basically displaces a lot of water when it does. And that is exactly what you are starting to see right now.”




--With assistance from Mark Sweetman in Moscow, Simon Kennedy and Jennifer Ryan in London, Jana Randow in Frankfurt and Kristine Aquino in Singapore. Editors: Dave Liedtka, Paul Armstrong


To contact the reporters on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net


To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net; Paul Dobson at pdobson2@bloomberg.net


* All content is copyrighted by Industry Intelligence, or the original respective author or source. You may not recirculate, redistrubte or publish the analysis and presentation included in the service without Industry Intelligence's prior written consent. Please review our terms of use.