Dollar, Yen to Rally as Skepticism Over Rescue Plan Increases

By Ye Xie
Feb. 11 (Bloomberg) -- The dollar and yen will strengthen in the next six months as skepticism about a U.S. plan to rescue the banking system increases demand for the currencies as a haven, a survey of Bloomberg users showed.

Participants turned positive on the U.S. greenback for the first time since December and are the most bullish on the Japanese currency since November, according to 3,069 respondents from New York to Tokyo in the monthly Bloomberg Professional Global Confidence Index. Investors became the most bearish on Mexico’s peso since November 2008.

Stocks fell yesterday, government bonds rallied and the dollar and yen appreciated even as Treasury Secretary Timothy Geithner pledged government financing for the bailout that may grow to as much as $2 trillion. Last month the International Monetary Fund cut its estimate for world economic growth this year to 0.5 percent, the weakest since World War II.

“There’s no quick fix,” said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey, and a survey participant.
The survey was conducted before Geithner yesterday presented his plan to for a joint public- and private-sector fund to buy as much as $1 trillion of illiquid assets and a $1 trillion program to supply new credit to consumers and businesses.
The index of expectations on the dollar rose to 50.16 for February, from 45.53 the previous month. A reading above 50 indicates participants expect the currency to appreciate. The dollar is prized in times of turmoil because of the liquidity provided through its status as the world’s largest reserve currency.

Bullish on Yen 

Investors are even more bullish on the yen, with the index measuring sentiment toward the Japanese currency rising to 68.79 from 64.54. The yen, which rallied against 177 currencies last year as the seizure in credit markets deepened, tends to outperform in times of turmoil as the country’s current-account surplus, the broadest measure of trade, attracts investors.

The dollar gained against 15 of the 16 most-widely traded currencies in the past month, rising 4.2 percent to $1.2903 per euro and appreciating 12 percent against the New Zealand dollar. The ICE Dollar Index, which tracks the greenback versus the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, touched 86.81 on Jan. 23, the strongest level since Dec. 8.
The yen touched a 13-year high of 87.13 per dollar Jan. 21, the same day it reached 112.12 per euro, the strongest in almost seven years.

Bearish on Treasuries 

The dollar and the yen are attracting more investors as expectations for a further slowing of the global economy reduces demand for higher-yielding currencies. The reading on the global economy fell to 8.49, from 8.72 in January. The IMF said on Feb. 5 that the U.S. gross domestic product will contract 1.6 percent this year, Japan’s will shrink 2.6 percent and the euro area will decline 2 percent.

U.S. participants became more bearish on Treasuries at the same time, with the U.S. planning to borrow $493 billion this quarter, a 34 percent increase over what it initially forecast, to help the government fund bailouts of financial companies and President Barack Obama’s stimulus package.

The sentiment index rose to 62.51, the highest since August, from 55.93, suggesting respondents expect a further increase in 10-year Treasury yields. The yield on the benchmark 10-year note rose above 3 percent this week for the first time since Nov. 28, from 2.035 percent on Dec. 18, the lowest on record for data going back to 1953.

Dollar ‘Vulnerable’ 

Higher yields complicate policy makers’ efforts to revive economic growth. Federal Reserve officials said on Dec. 16 and Jan. 28 that they may resort to buying longer-term Treasuries to keep borrowing costs from rising. The amount of assets held by the Fed more than doubled to $1.85 trillion as of Feb. 4 from $912 billion in September, according to the central bank.

“The deterioration of the fiscal position leaves the dollar vulnerable,” said Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc., who participated in the survey. “I cannot imagine the Fed’s potential move in the Treasury market can be a positive for the dollar from a longer- term point of view.”
Investors reduced their outlook for the euro. The index measuring the sentiment on the 16-nation currency fell to 56, from 58.21, the second straight decline.

Widening Deficits 

The euro lost 7.6 percent against the dollar this year on concern the European economic slowdown will deepen and the fiscal deficit in such member countries as Italy and Spain may keep widening. European Central Bank President Jean-Claude Trichet indicated on Feb. 5 that policy makers will lower the main refinancing rate by a half-percentage point next month after holding the target at 2 percent.
In U.K., participants added to their bets against the pound. The index of the sentiment on sterling declined to 48.48, from 49.46. The pound depreciated to $1.3503, the lowest level since 1985 when Margaret Thatcher was U.K. prime minister, on speculation the banking crisis in the country intensified. On a trade-weighted basis, the currency lost 19 percent since the end of 2007, according to the Bank of England.
Participants expect Latin American currencies to depreciate, the survey shows. The index on the Mexican peso dropped below 50 for the first time since October, declining to 40.78, from 64.73 in January. The index on Brazil’s real fell to 47.8, from 52.1, the second drop in three months.

Peso, Real 

The peso depreciated to a record low of 14.7059 per dollar on Feb. 4, prompting the Mexican central bank to intervene in the foreign-exchange markets by buying the local currency to stem its slump.
The real lost 2.4 percent versus the dollar in the past month. Brazil’s central bank cuts its benchmark interest rate to 12.75 percent from 13.75 percent on Jan. 21, the biggest cut since 2003, and signaled it may lower the rate further to keep the economy expanding.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net
Last Updated: February 11, 2009 07:00 EST