Feb. 4 (Bloomberg) — Ben S. Bernanke’s decision to lower interest rates 1.25 percentage points last month will end the dollar’s two-year slide, according to the world’s biggest currency traders.
For the first time since 2003, investors are focused on relative growth prospects rather than absolute borrowing costs, according to Geoffrey Yu, a London-based strategist with UBS AG, the No. 2 trader. The steepest cuts by a Federal Reserve chairman in seven years will support economic growth in the U.S. as Europe slows, said BNP Paribas SA, the most accurate currency forecaster Bloomberg tracks. The dollar will gain at least 9 percent against the euro this year, UBS and BNP predict.
“We’re not chasing dollar weakness any lower,” said Robert Robis, a fixed-income manager in New York at OppenheimerFunds Inc., which oversees $260 billion. “The Fed’s actions have avoided a long recession and we may start to see a recovery later this year.”
Robis has reduced the share of euro-denominated assets versus those linked to the dollar in his $9 billion portfolio. It now holds less than the benchmark index because he expects the U.S. currency to outperform. As recently as November, he was “overweight” the euro against the dollar.
Futures traders cut the value of contracts benefiting from a drop in the dollar to $13.9 billion as of Jan. 29, according to Charlotte, North Carolina-based Bank of America Corp., the second-largest U.S. bank by assets. That’s down from a record $32.3 billion in November.
The dollar has benefited from Fed rate cuts before. During the first six months of 2001, the currency gained 10 percent against the euro as the central bank slashed its target 2.75 percentage points to below the ECB’s benchmark refinance rate following the bursting of the technology bubble.
… “If aggressive cuts by the Fed can stimulate the economy, then the U.S. will definitely lead the way in terms of economic recovery,” Yu said. “The ECB is behind the curve, so it’s time to move back” into the dollar, he said.
That’s like an employee saying: “Now that my boss has slashed prices below cost, I’m VERY optimistic about our future because of all the business we’re about to steal from our competitor!” It’s completely missing the point: yes, more people will come in and buy your stuff, but in aggregate, you’re still going to be a lot worse off than before, it’s not sustainable, and at some point you will have to readjust prices back to their natural levels.
All other things equal, the interest rate differential between the USD and all global currencies has yawned 200 basis points wider in the past six months — and not in the dollar’s favor. You’d expect variable-dollar assets, i.e., stocks, real estate and commodities, to thrive in such an environment. But the aggregate has still been very negative for the dollar’s standing in the world.
Also, I can’t overemphasize how tired I am of meaningless, unfalsifiable commentary such as, “Blah Blah Central Bank is behind the curve.” What the hell does that mean? Is a central bank “behind the curve” whenever it doesn’t track LIBOR? Whenever it doesn’t track a certain treasury yield curve? Why have a central bank if it had no job other than to track the curve? Obviously, a central bank has duties other than following the curve. If there are concerns about currency stability, for example, it might be worth it for a central bank to stay a little bit behind the curve, so as to reassure investors that it places a high premium on currency stability, within meaningful parameters.
You never hear bankers clamoring about how “behind the curve” the Fed is when the Fed is raising rates. Somehow the Fed is only behind the curve when it isn’t cutting rates fast enough. The more I see mechanistically predictable comments such as Yu’s, the more I am convinced that these white-shoe institutional banking types have no clue what they’re doing.
I guess after the Fed cut 125 basis points in eight days, Wall Street finally has enough shame to adopt a party line besides, “Bernanke is behind the curve.”
“We still believe the U.S. promises good returns,” Sultan bin Sulayem, the chairman of state-owned investment group Dubai World, said Jan. 25 at the World Economic Forum in Davos, Switzerland. Dubai World agreed in August to invest as much as $5.1 billion in Kirk Kerkorian’s Las Vegas-based casino group MGM Mirage.
Middle Eastern and Asian investors have poured up to $39 billion into U.S. banks since August, according to Bloomberg calculations. Foreign holdings of U.S. securities rose a net $149.9 billion in November, the most in 22 months, the Treasury Department said last month in Washington. In October, the gain was $92.2 billion.
Maybe America really is exceptional. Maybe, despite the best efforts of policymakers, “up” is the manifest destiny of the dollar.
Stay short the dollar. Tone down the leverage, though. Apparently there are some very fundamental misapprehensions about what does and doesn’t constitute sound currency policy at some of our “commanding heights” institutions …
I remain where I have been for some weeks: very bullish about stocks, especially US ones if you don’t count dollar fluctuations, and very bearish on bonds. It’s up to you whether you want to dip in now or later, after the monolines bull has knocked over some more china in the china shop.
My sense is that “the drift” will be all upwards over the coming two to four weeks, but whenever any bad monolines headline crops up on Bloomberg, the market will drop 250 points before you can say “WTF, mate?”