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US dollar will appreciate after second half

30 June 2009 13:21 (UTC +04:00)

Bakuâ€“ APA-Economics. CIBC World Markets, Deutsche Bank, Bank of America and Wells Fargo estimate the US currency will rise more than 4pc by the end of the year after May ended with its sharpest three-month fall since 2002.

At the start of the year, all had second-quarter forecasts within a penny or two of the $1.4056- per-euro close on June 26, Bloombergâ€™s currency survey shows.

â€œIâ€™m reasonably bullish on the dollar,â€ said Henrik Gullberg, a currency strategist in London at Frankfurt-based Deutsche Bank, which Euromoney Institutional Investor ranks as the worldâ€™s biggest foreign-exchange trader. â€œIf you look at the data over the past few weeks, it has been consistent with the situation where the US is a quarter or two aheadâ€ of the 16-country euro region in rebounding, he said.

At the start of the year, after 2008 closed with the euro worth $1.3971, Deutsche Bank said it would stand at $1.40 by June 30.

Now the bank predicts the dollar will gain 17.1 percent to $1.20 a euro by year’s end, which would be its best performance since 1981.

This quarter the euro is up 5.6 percent to trade at $1.4026 early in London yesterday. Against the yen, which has declined against all 16 major currencies, the dollar has gained 5.3 percent this year to Â¥95.46.

Pro-dollar predictions reflect signs that the US economy is emerging from the worst turmoil since World War II. Economists surveyed by Bloomberg predict the US will grow 1.9 percent next year after shrinking 2.7 percent this year as the euro zone contracts 4.3 percent before expanding 0.5 percent.

Last week the US Federal Reserve said that "the pace of economic contraction is slowing", while the Organisation for Economic Co-operation and Development urged the European Central Bank to cut interest rates to speed the recovery.

"In Europe there’s a lot of headwinds, so the bullish dollar story is based on what’s going on elsewhere," said Adam Fazio, a CIBC currency strategist. CIBC predicts a 4.1 percent dollar rise in the second half.

Forecasts are the most scattered in two years, with fourth-quarter predictions ranging from $1.16 to $1.55 a euro. The median of 48 forecasts sees the euro ending the year at $1.40.

Market uncertainty is driving up foreign exchange swings.

Fluctuations in Group of Seven (G7) currencies have risen to more than double what they were in the year before the credit crunch started in mid-2007; the G7 volatility index closed at 14.4 percent on Friday.

In the past six quarters, HSBC Holdings was the only forecaster in Bloomberg’s survey that was among the five most accurate dollar-euro prognosticators thrice in a row.

HSBC has gone from positive to negative on the currency. After foreseeing $1.25 a euro by this quarter’s end, HSBC predicts $1.50 by December 31.

"The dollar is vulnerable because of the quantitative easing policy," said HSBC currency strategist Paul Mackel.

The greenback fell against the euro from early 2002 until the economic crisis exploded in mid-2008, when it strengthened to a two-year peak of $1.233 a euro on October 28 as investors fled to the safety of US treasuries. It has been a roller-coaster since - $1.4719 on December 18, $1.2457 on March 4 and then an 11.4 percent fall as investors returned to riskier investments.

The dollar fell 0.9 percent on Friday, after Chinese policy makers renewed calls for a new global currency "delinked from sovereign nations".

Despite such talk, investors aren’t deserting dollar assets. The Fed’s custodial holdings of treasuries for foreigners rose to a record $1.96 trillion in June as foreigners bought $15.2 billion in the week to June 24.

"You don’t have to bet on the recovery to be bullish on the dollar," said Christoph Kind at Frankfurt-Trust Investment. "If the situation stays as bad as it is, the dollar is a safe haven. If the economy turns the corner, the US will be the first to get out of the recession." Source: Bloomberg