The world’s most accurate foreign-exchange forecasters say the dollar will be the best currency to own this year as the Federal Reserve’s bond purchases bolster the U.S. economy instead of debasing America’s legal tender.
Wells Fargo & Co., Bank of Tokyo-Mitsubishi UFJ Ltd. and SJS Markets Ltd., the top analysts in the six quarters ended Dec. 31, according to data compiled by Bloomberg News, say the dollar will strengthen against the euro, yen and pound. Nick Bennenbroek, the head strategist at Wells Fargo in New York and the most accurate of the group, predicts about a 5 percent gain against the euro over the year and 11 percent versus the yen.
The survey underscores the sudden turnaround in the U.S. economy two months after the greenback fell to its weakest level in almost a year in November. Traders have turned their focus away from the Fed’s plan to print cash to buy $600 billion of Treasurys and toward Europe’s debt crisis, deflation in Japan and U.K. austerity programs.
“The superior growth performance of the U.S. should shine through in 2011,” said Bennenbroek, 40, who joined the bank in 2007 and began his career in the forecasting department at the New Zealand Treasury in Wellington. “We will see the economic recovery in the U.S. outpacing that of Europe, Japan and even the U.K., which would see the dollar stronger against those currencies.”
Better Economic Data
The dollar’s outlook improved as data showing gains in jobs, manufacturing and retail sales the past six weeks helped drive IntercontinentalExchange Inc.’s Dollar Index up 7.1 percent to 81.012 from last year’s low of 75.631 on Nov. 4. That was a week before the Fed began buying government debt to spur the economy in a policy known as quantitative easing, or QE. The index rose 0.1 percent to 81.116 Monday.
“Back in September and October, the world was debating the prospects of more QE in the U.S. — dollar negative — while now investors are debating the chances of the Fed doing less than the $600 billion of QE — dollar positive,” Valentin Marinov, a currency strategist at Citigroup Inc. in London, wrote in a research note on Jan. 6.
The U.S. economy will expand 2.6 percent this year, according to the median of 68 forecasts compiled by Bloomberg. Growth in the euro region will rise 1.5 percent, with Japan at 1.3 percent and the U.K. at 2 percent, surveys show.
The dollar jumped 3.70 percent against the euro last week, the most since August, to $1.2907. Japan’s currency fell 2.4 percent, the biggest weekly decline since December 2009, to 83.15 per dollar. The pound slipped 0.4 percent to $1.5548. The greenback will end the year at $1.31 per euro, 90 yen and $1.58 to the pound, based on the median of more than 30 forecasts compiled by Bloomberg.
Bennenbroek said the dollar will benefit from rising interest rates on U.S. bonds. Inflation-adjusted, or real, yields on 10-year Treasuries climbed to 2.18 percent last week from 1.46 percent at the end of October. The dollar surged 8.06 percent versus the euro in the period, 3.42 percent against the yen and 3.15 percent to the pound.
“We’re getting some of the most encouraging signals we’ve seen in a while in terms of data, so bond yields are going up and supporting the dollar,” he said.
Employers added 103,000 workers in December, a third month of gains, the Labor Department in Washington said on Jan. 7. Manufacturing in the U.S. expanded last month at the fastest pace in seven months, while retailers’ 2010 holiday sales jumped 5.5 percent for the best performance since 2005, reports in the past two weeks showed.
The dollar may benefit should increasing U.S. consumption appease nations from Brazil to China that are struggling to keep their exchange rates from appreciating. Brazil’s central bank introduced controls on some dollar positions held by local banks on Jan. 6, its third attempt since October to stem strength in the real, which rose 14 percent from its closing low last year on Jan. 29 through year-end.
“The first half of the year across the board is going to be a supportive environment for the dollar,” said Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London, the fifth-best forecaster. “The U.S. is perpetuating its normal style of growth, which is consumer driven, and the emerging- market world is able to perpetuate its export-driven model, which is not a negative scenario for the dollar.”
Europe’s currency may rebound as U.S. growth fades amid trillion-dollar deficits and record low central bank rates, said Jeremy Stretch, executive director of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London, the No. 7 forecaster overall and No. 2 for dollar-yen.
The Obama administration’s 2011 budget predicts a $1.267 trillion deficit for the fiscal year ending Sept. 30. The Fed won’t raise its target rate for overnight loans between banks until 2012, boosting it to 0.75 percent from a range of zero to 0.25 percent, according to a Bloomberg survey.
America’s currency may rise to $1.22 per euro before weakening in the second half as the European Central Bank “becomes more mindful of the residual strength of the German economy” and raises rates, said Stretch. CIBC sees the euro at $1.32 by Dec. 31.
Bennenbroek’s picks helped Wells Fargo beat 55 firms across eight currency pairs with a 4.97 percent average margin of error, data compiled by Bloomberg show. His calls, assisted by strategist Vassili Serebriakov, 33, ranked first in sterling, second in euro-yen and third in the euro versus the dollar.
Wells Fargo climbed from third place in the second and third quarters of 2010 and sixth in the first quarter to unseat Standard Chartered, based in London. Tokyo-based Bank of Tokyo-Mitsubishi, which had a 5.07 percent margin of error, and Hong Kong-based SJS, an independent global financial-services company with 5.64 percent, came next. SJS, which doesn’t currently have a foreign-exchange analyst, declined to comment.
“We are dollar bulls when it comes to major currencies and we did well as dollar bulls in 2010 because of the euro,” said Moscow-born Serebriakov, who joined Bennenbroek in 2008. “We will have a market that is more focused on U.S. events in 2011 from the logic that the recovery is picking up pace and U.S. news will play more prominently.”
Derek Halpenny, European head of global currency strategy at Bank of Tokyo-Mitsubishi since 2008, had the lowest margin of error for the euro against the dollar at 4.96 percent. He said the dollar would strengthen in November 2009, when the euro traded at $1.51. He is still bullish.
“It comes back to the same story: relative fundamentals and the expectations that are built into the market in regards to future monetary policy,” said Halpenny. “Ultimately that is where the dollar bears get carried away, saying the Fed is printing money, debasing their currency and the dollar is going to go down. It just isn’t backed up.”
U.S. 10-year real yields are more than a percentage point higher than the Japanese equivalent, which ended last week at 1.11 percent. Euro real yields were at 0.97 percent and the U.K. at 0.21 percent.
Halpenny, 40, recommends betting the pound will fall against the Canadian dollar, which will benefit from stronger U.S. growth. The U.S. is Canada’s largest trading partner.
“We are bearish on the pound,” he said. “They are now about to embark on quite aggressive fiscal consolidation and that to us points to pound underperformance.”
Britain’s government has faced opposition over planned austerity measures designed to cut a record budget deficit. Student protests against an increase in tuition fees turned violent last month, while union leaders have said they may strike against proposed job cuts.
The foreign-exchange analysts were compared based on the forecasts at the end of each quarter for the close of the next, starting with the third quarter of 2009. One annual estimate which was made at the end of Dec. 2009 for exchange rates as of Dec. 31, 2010, was also included. All estimates were weighted equally.
Only firms with at least four forecasts for a particular currency pair were ranked for it, and only those that qualified in at least five of eight pairs were included in the ranking of best overall predictors. In all, 55 firms submitted enough forecasts to be ranked in at least one currency.
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