By Garth Theunissen
Jan. 25 (Bloomberg) -- The retreat in the dollar that sent the currency down as much as 17 percent from its 2009 peak against six main trading partners may be over, according to Pacific Investment Management Co.’s Paul McCulley.
The Dollar Index has rebounded 5.3 percent from last year’s low in November on signs of economic recovery. The U.S. currency is unlikely to resume declines “particularly against sterling, the euro and the yen” as the world’s biggest economy improves, McCulley, a portfolio manager and member of the investment committee at Pimco, said in an interview in Johannesburg today.
“Against the majors, we’re pretty close to the end, if we haven’t already reached the end of a bear market in the dollar,” said McCulley at Pimco, which runs the world’s biggest bond fund. “The dollar bear market is almost done.”
The U.S. economy probably grew in the closing months of 2009 at the fastest pace in almost four years as factories stepped up production and companies purchased new equipment, economists said before reports this week. The Federal Reserve will wait for further signs of recovery before raising its benchmark interest rate and probably won’t lift borrowing costs this year, according to Pimco.
The dollar fell 0.1 to 1.4151 against the euro by 10:30 a.m. in New York. The U.S. currency slipped 0.4 percent against the pound to 1.6178, and lost 0.3 percent versus the yen to 90.05.
Rate Fears ‘Overblown’
“Fears of a nearby move to monetary tightening in the U.S. are overblown,” said McCulley. “The Fed would purposely rather make a mistake in tightening too late rather than too soon.”
The Fed’s likely withdrawal of its so-called quantitative easing measures, which involves buying bonds, will enable policymakers to “tighten monetary conditions” without raising benchmark rates, said McCulley.
“The Fed’s not going to do anything to its policy rate until it’s able to observe the economic reaction to an end of quantitative easing,” said McCulley, adding that the program is likely to be concluded by end-March.
Emerging-market currencies including the Chinese yuan, Korean won and Brazilian real will appreciate against the dollar over the next three to five years as economic growth in developing nations outpaces that of advanced countries, according to McCulley. The Canadian, Australian and New Zealand dollars are also likely to advance against the U.S. currency over the period because of their “commodities exposure,” said McCulley.
The U.S. economy will probably expand 2 percent a year on average over the next three to five years, he said.
‘Proxy for Growth’
“If you look at currencies as a proxy for growth, then you can anticipate that emerging-market currencies will appreciate against the dollar,” said McCulley. “We are big believers in the emerging markets.”
The won has gained 1.2 percent against the dollar this year, the yuan is little changed and the real has weakened 4 percent against the U.S. currency. The MSCI Emerging Markets Index of shares has lost 2.9 percent in 2010.
Developing nations in Asia are attractive for equity investors “looking to get growth into their portfolios,” he said.
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