Dollar Slide Will Halt on ‘Aggressive’ Fed, BT Investment Says

By Candice Zachariahs

Dec. 3 (Bloomberg) -- The U.S. dollar will extend its drop versus the euro and reach parity with Australia’s dollar in 2010 before “aggressive” interest-rate increases by the Federal Reserve boost the greenback, BT Investment Management said.

The U.S. dollar has weakened against all 16 of the most- traded currencies this year as unemployment surged to the highest since 1983 and the Federal Reserve pledged last month to keep interest rates near zero for an “extended period.” Current rates make the dollar a favorite in carry trades where low-cost funds are used to invest in higher-yielding assets.

“Given the Fed’s stance on raising rates and where the economy is at the moment, I don’t think we’ll see a real strong growth in the U.S. dollar again until mid to late next year,” said Joe Bracken, who oversees A$4 billion ($3.7 billion) as head of macro strategies at BT Investment Management in Sydney. “Once the growth really comes back, the Fed will be very, very worried indeed about this growth translating into inflation and they will very quickly raise rates.”

The Fed increased its target rate in 17 consecutive quarter-point moves between June 2004 and June 2006 in the longest series of increases without a pause or cut since the FOMC began announcing the direction of target rates in 1994. That’s the year the central bank began another series of increases that took the benchmark rate from 3 percent before the first increase in February to 6 percent a year later.

Growth Story

“The Fed will be pretty aggressive in putting rates back up, that’s what history tells us,” Bracken said. “Once they start to do that, Treasuries will get creamed and the carry trade will reverse pretty quickly.”

The U.S. dollar has fallen 16 percent against the euro over the past 12 months and traded at $1.5091 as of 12:39 p.m. in Tokyo. It has lost 30 percent versus Australia’s dollar over the same period to trade at 92.96 U.S. cents per Aussie.

Bracken said his currency portfolio has returned 15 percent over the past 12 months. The fund invests in currencies that provide “diversification benefits” including the U.S., Canadian and Australian dollars, euro, yen, pound, Brazil’s real, the Korean won and South Africa’s rand, he said.

The fund is bullish on the Australian and Canadian dollar, Brazil’s real and the Korean won, according to Bracken. It also has a so-called long position in the yen, which provides a “very good buffer” against any ebbing in risk appetite, he said. A long position profits when an asset rises.

“The growth story has some legs particularly in Southeast Asian countries,” Bracken said. “Aussie dollar as a commodity currency, as a risk currency, as a carry-trade currency continues to have a lot of legs and you’ll probably see it approach parity with the U.S. dollar. It’s a very similar story for the Canadian dollar.”

Against the U.S. dollar, the Brazilian real is the best- performer among the 16 most-traded currencies over the past 12 months followed by the Australian dollar. Korea’s won is the sixth biggest-gainer and Canada’s dollar the ninth.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

Last Updated: December 2, 2009 23:05 EST

Wakabayashi Sees Yen Rising to 74 Per Dollar by 2011 (Update1)

By Shigeki Nozawa

Dec. 3 (Bloomberg) -- The yen may rise to a record 74 per dollar by 2011 because the Bank of Japan hasn’t done enough to combat deflation, said Eishi Wakabayashi, a strategist who forecast the currency’s surge to an all-time high in April 1995.

Wakabayashi, head of Tokyo-based Wakabayashi FX Associates Co., said the BOJ should re-think its “fundamentalist” stance on combating inflation while neglecting measures to stimulate the economy.

Prime Minister Yukio Hatoyama’s government should revise the central bank’s by-laws to give it a mandate to stabilize prices and expand employment, similar to that provided to the U.S. Federal Reserve, he said.

Any attempt by the Bank of Japan to stem the yen’s advance would be “foolish and would have little effect,” Wakabayashi, 66, said in an interview in Tokyo.

The yen rose as high as 84.83 per dollar on Nov. 27, the strongest level since July 1995. Japan’s currency traded at 87.88 to the greenback as of 2:49 p.m. in Tokyo. The yen reached a post-World War II high of 79.75 in April 1995.

Japan should ask the U.S. and Europe to take coordinated action to weaken the yen, Financial Services Minister Shizuka Kamei said in an interview in Tokyo yesterday. Japan hasn’t intervened in the foreign-exchange markets since March 2004.

Brief Reverse

The dollar will briefly reverse its decline after falling to 80 yen in February 2010, Wakabayashi said. The U.S. economy may stop losing jobs around March, and the dollar’s slide will also spark inflation concern, pushing up longer-term bond yields, he said.

By the end of the third quarter of 2010, the global economy will suffer deflation as an asset bubble bursts in Brazil, Russia, India and China, collectively known as the BRIC countries, Wakabayashi said. The dollar will weaken to an all- time low of 74 yen in 2011, he said.

Wakabayashi, citing technical charts, said the dollar-yen moves in a five-year cycle. The currency pair reaches a bottom once every five years, followed by a rebound. The recent troughs came in 1995, 1999 and 2005, the strategist said.

The dollar has been declining in three-stage “waves” against the yen, Wakabayashi said. The first wave was from 1971 to 1978, when the dollar depreciated to 177 yen from 360 yen, and the second covered the period when the dollar weakened to a record 79.75 yen in April 1995, he said.

Wakabayashi said we are now in the third wave, and this will come to an end in 2011, concluding the dollar’s 62-year decline that began in 1949, when the yen’s peg to the dollar started as part of the Bretton Woods system to restrain inflation.

To contact the reporter on this story: Shigeki Nozawa in Tokyo at snozawa@bloomberg.net.

Last Updated: December 3, 2009 00:59 EST