Dollar Gains Buckle as Strategists Draw Line at $1.20
FX Concepts Inc. CEO John Taylor pauses during a television interview in New York. Photographer: Jonathan Fickies/Bloomberg
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John Taylor, who heads the world’s largest hedge fund dedicated to currencies, predicted in March that the dollar would appreciate to $1.20 per euro from about $1.35 at the time. He was proven right two months later.
The chairman of FX Concepts LLC in New York now says the greenback may be due for a respite after the trade-weightedDollar Index gained 9.57 percent from the end of 2009, its best start to a year since 2005. Taylor is one of a growing number of traders waiting for evidence that the European Union’s almost $1 trillion bailout plan isn’t working before pushing America’s currency higher.
“We are scary, scary owners of euros,” said Taylor, whose firm manages $7.5 billion. “We are keeping our fingers crossed that maybe the euro’s appreciation lasts through July and into August. But then the euro is just going to get crushed as it’s an impossible situation in Europe.”
Taylor has plenty of company. The median year-end estimate of 27 strategists and economists surveyed by Bloomberg has held at $1.20 since June 2, the longest stretch without an increase this year. At the start of January, they predicted the dollar would end 2010 at $1.45 to the euro.
The Dollar Index, which measures the currency against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, is down 3.5 percent since June 7 as concern eases that Europe’s fiscal crisis will cause a nation to default.
‘Status Quo’
“We will see a couple weeks to a few months of status quo with not much happening,” said Peter Jacobson, managing director in Singapore at Rhicon Currency Management Ltd., which oversees $400 million. “Typically, the status quo is good for risk, and if that’s the case we should see the rally in the dollar that we saw for the first half of the year subside a bit.”
Futures traders are unwinding record bets that the dollar will rally. The number of contracts hedge funds and other large speculators hold betting on a rise in the dollar versus a fall against currencies traded at the Chicago Mercantile Exchange declined by 70 percent to 49,335 in the week ended June 22 from the peak of 163,085 on June 8, according to Washington-based Commodity Futures Trading Commission data.
The dollar traded at $1.2371 per euro today and at 89.32 yen. The greenback has weakened after strengthening to $1.1877 per euro on June 7 from $1.4321 at the end of December. Of the most-traded currencies tracked by Bloomberg, the only ones the dollar hasn’t risen against this year are those of Japan, Mexico, Canada and Singapore.
‘Fair Value’
“The euro at $1.20 is fair value, so we’ve taken away one of the big arguments for why the euro will fall against the dollar,” said Richard Benson, who oversees $14 billion of currency funds as an executive director of Millennium Asset Management in London. “The other is that the U.S. economy will do a lot better, but it hasn’t done much better. People are worried about a double dip in the U.S.”
While Millennium has trades that would benefit from a decline in the dollar, it reduced the size of those positions “quite a lot,” Benson said in a telephone interview.
The Commerce Department in Washington said June 25 that the U.S. economy grew at a 2.7 percent annual rate in the first quarter, less than its 3 percent estimate last month, reflecting a smaller gain in consumer spending and a bigger trade gap.
Federal Reserve policy makers led by Chairman Ben S. Bernanke said June 23 that the labor market is “improving gradually,” while consumer spending “remains constrained” by joblessness and “tight credit.” The recovery is “likely to be moderate for a time,” the Fed said.
Growth Estimates
A successful bond sale by Spain and an agreement by EU leaders to disclose how banks perform on stress tests have tempered concern that nations will have trouble financing themselves. Spain sold 3 billion euros ($3.7 billion) of 10-year debt on June 17 to yield of 4.864 percent, below the 5.04 percent that the bonds traded at before the sale. Investors bid for 1.89 times the amount offered.
The European Central Bank raised its euro-region growth forecast for this year on June 10 to 1 percent, from a previous estimate of 0.8 percent. It will grow about 1.2 percent in 2011, the ECB predicted.
“If the data flow improves or just stabilizes, funds will shift back into higher-yield and cyclical currencies,” said John Normand, head of global-currency strategy at JPMorgan Chase & Co. in London.
JPMorgan Forecasts
JPMorgan forecasts the dollar will end the year at $1.20 per euro, according to data compiled by Bloomberg. It will depreciate to 92 U.S. cents versus Australia’s currency and to 95 cents against the Canadian dollar, according to JPMorgan estimates on Bloomberg.
The bank released the results of their second-quarter survey of clients on June 25 showing that companies in the U.S., Europe and Japan expect the euro will remain depressed versus the dollar for the remainder of 2010.
More than 90 percent of the 141 respondents, which have a total market capitalization of $2 trillion, say the euro will remain below $1.30 by the end of the year. The average forecast, weighted by the size of the companies, fell to $1.22, from $1.34 in the March survey.
“The period we are in now is the euro’s swan song,” said FX’s Taylor. The EU’s bailout package is making “people think things are OK and maybe all will be alright. When the reality hits us in September it will be miserable. I expect the euro to go to $1 by the end of the year,” he said.
ECB Program
This week an ECB program to flood Europe’s financial system with long-term funding to encourage lending and fight the worst economic crisis since World War II ends. The central bank lent 442 billion euros in a June 2009 auction of one-year funds at a fixed rate of 1 percent in its Long Term Refinancing Operation. The ECB is still offering loans with a three-month program.
Billionaire investor George Soros said continental European banks haven’t been “properly cleansed” after the credit crisis because they haven’t marked the value of their holdings to market prices.
“The current crisis is more a banking crisis than a fiscal one,” Soros, 79, said in remarks prepared for a speech in Berlin on June 23. “Bad assets haven’t been marked to market, but are being held to maturity. When markets started to doubt the creditworthiness of sovereign debt it was really the solvency of the banking system that was brought into question because banks were loaded with the bonds of the weaker countries and these are now selling below par.”
‘Heavy Lifting’
At this time in both 2008 and 2009, forecasters were predicting average second-half gains of 1.4 percent for the dollar versus 46 currencies tracked by Bloomberg. This year, they see a 0.5 percent gain, data compiled by Bloomberg show.
“Risk is coming back into the market and the U.S. has to do the heavy lifting with regard to economic growth,” said Axel Merk, who oversees $500 million as president and chief investment officer of Merk Investments LLC in Palo Alto, California. “In that context, the commodity currencies do well as do the European currencies.”
Canada’s dollar may appreciate to C$1 by year-end from C$1.0326 today, while Australia’s will likely rise to 89 U.S. cents, from 87.4 U.S. cents, separate surveys show.
The yen has been the biggest winner among the most-traded currencies this year, strengthening 4.1 percent against the dollar, followed by a 3.5 percent rise in the Mexican peso and 2 percent gain in Canada’s currency. The median estimate of strategists surveyed by Bloomberg is for the yen to weaken to 97 by year-end.
The only currency to do worse than the euro is the Danish krone, which is pegged to Europe’s common currency. It has depreciated 13.6 percent. Norway’s krone is down 10.1 percent, while Sweden’s krona has lost 7.2 percent.
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