Bloomberg News

Dollar Beating All Assets in September Belies S&P Downgrade

October 03, 2011

(Updates Dollar Index performance in ninth paragraph.)

Oct. 3 (Bloomberg) -- After all the concern that the U.S. is debasing its currency, the dollar beat stocks, bonds and commodities for the first time since May as investors sought refuge from slowing growth and Europe’s sovereign-debt crisis.

The U.S. currency rose 6 percent in September, according to IntercontinentalExchange Inc.’s Dollar Index, beating returns of 1.6 percent by Bank of America Merrill Lynch’s U.S. Treasury Master Index. The MSCI All-Country World Index of stocks in 45 countries lost 8.9 percent, the largest monthly drop since May 2010. Raw materials measured by the Standard & Poor’s GSCI Total Return Index of 24 commodities slid 12 percent.

Gains for the world’s reserve currency show investor confidence in the nation’s creditworthiness after Standard & Poor’s stripped the U.S. of its AAA rating two months ago. Even with Republican leaders in Congress joining critics of Federal Reserve stimulus measures, the currency bested all 16 of its most-traded counterparts in September for the first month in more than three years.

“In a time of crisis you want to be holding the most liquid currency out there,” Aroop Chatterjee, a currency strategist at Barclays Capital Inc. in New York, said in a telephone interview Sept. 27. “It waters down the argument for ‘the end of the dollar as a reserve currency.’”

Strategists reduced forecasts for the euro versus the dollar and sterling by the most since June 2010 last month. Predictions the Canadian dollar will gain against the greenback dropped the most since October 2008.

Dollar Gains

Hedge funds and other large speculators who had held an aggregate bet the dollar would weaken for 14 months capitulated, with more wagers on gains than losses for the first time since July 2010. Traders added the most bullish contracts in the week ended Sept. 20 since January 2010.

Trades that expect the dollar to strengthen against the euro, yen, pound, Swiss franc and Mexican peso, as well as the Australian, Canadian and New Zealand dollars, surged to 128,155 on Sept. 27, according to Commodity Futures Trading Commission data as compiled by Bloomberg.

The dollar strengthened 0.8 percent to $1.3387 per euro last week, extending its September advance versus the 17-nation currency to 6.8 percent, bringing its gain for the third quarter to 7.7 percent. The greenback appreciated 0.6 percent to 77.06 yen in the five days ended Sept. 30, reducing its loss since June to 4.5 percent.

Broad Increase

The Dollar Index, which tracks the currency against those of six trading partners, had the biggest monthly increase since October 2008, reaching 79.365 today, the highest level since Jan. 18. The U.S. currency rose 8.2 percent against nine developed-nation counterparts in September, according to the Bloomberg Correlation-Weighted Indexes, the biggest gain since October 2008.

Today, the dollar reached $1.3238 per euro, the strongest level since Jan. 13. It touched 77.27 yen, the highest level since Sept. 15.

The dollar’s 5.7 percent increase in the third quarter was topped only by Treasuries, which rallied 6.4 percent, according to Bank of America Merrill Lynch data. Sovereign debt in the rest of the world returned 3.15 percent, and AAA-rated U.S. corporate bonds gained 6.4 percent. The MSCI Index of stocks fell 18 percent and S&P’s commodity index slumped 12 percent, the biggest quarterly decline since the three months ended in December 2008.

Swiss Franc, Yen

Investors turned to the dollar as Switzerland and Japan intervened to stem gains in their currencies. The Swiss National Bank announced on Sept. 6 it would purchase “unlimited quantities” of foreign currencies to prevent the franc from strengthening beyond 1.20 per euro.

The Bank of Japan sold 4.51 trillion yen ($58.5 billion) in the biggest move in seven years in August, as the currency reached a post World War II-record of 75.95 per dollar on Aug. 19.

“The dollar’s strength is as much by default as its own virtues,” said Alan Ruskin, global head of Group-of-10 foreign- exchange strategy at Deutsche Bank AG in New York by telephone Sept. 27. “The dollar has attracted funds because there’s nowhere else to go with that kind of liquidity,” and the U.S. isn’t fighting dollar gains, he said.

Carry Trades

Investors exited higher-risk assets by unwinding so-called carry trades, which use borrowings in currencies of nations such as the U.S. with low interest rates to buy assets in economies with higher yields, as volatility soared. The strategy lost 6.6 percent in September, the most since at least 1998, when records began, according to an index compiled by UBS AG.

Implied volatility among major currencies reached the highest level since May 2010, according to the JPMorgan Chase & Co.’s Global FX Volatility Index.

The dollar makes up 60.2 percent share of the world’s currency reserves, more than double the 26.7 percent for the euro, which has the next biggest portion, according to the International Monetary Fund in Washington.

While S&P had used the dollar’s position to reaffirm its AAA rating in April, the company cited the weakening “effectiveness, stability and predictability of American policymaking and political institutions,” in its Aug. 5 downgrade of the U.S.

Calculation Error

S&P cut the rating by one step even after Treasury Department officials told the firm it had overestimated future national debt by $2 trillion. S&P, a unit of New York-based McGraw-Hill Cos., said the error didn’t affect its decision. The company announced on Aug. 23 that it would replace President Deven Sharma with Citibank NA Chief Operating Officer Douglas Peterson.

A Bloomberg survey of 1,031 subscribers found that 57 percent of U.S. investors agreed with S&P’s decision, compared with about 75 percent of those in Europe and Asia. The quarterly review showed that 72 percent of U.S. investors found the nation’s creditworthiness good or excellent, while 45 percent of Europeans agreed and 42 percent of Asians.

While most of those polled backed S&P’s downgrade, 35 percent of investors said that overall the grades given by rating firms aren’t reliable. Only 1 percent called them very reliable, 18 percent fairly reliable and 45 percent just somewhat reliable.

Moody’s, Fitch Affirm

Moody’s Investors Service and Fitch Ratings affirmed their top rankings on Aug. 2 and Warren Buffett, the world’s most successful investor, said the U.S. should be rated “quadruple A” rather than AA+. The Securities and Exchange Commission has also sent subpoenas to hedge funds as part of an investigation into whether some investors traded on confidential tips ahead of the downgrade.

Republican Senate Minority Leader Mitch McConnell of Kentucky and House Speaker John Boehner of Ohio wrote Fed Chairman Ben S. Bernanke a letter Sept. 20 urging him to refrain from more stimulus to avoid “further harm” to the economy.

Texas Governor and leading Republican presidential candidate Rick Perry said in August that additional measures from Bernanke would be “almost treacherous -- or treasonous.” China, Germany and Brazil said last year that the U.S. central bank was weakening the dollar to help exports.

The complaints may have helped the currency by narrowing policy options, said Shahab Jalinoos, a senior currency strategist for UBS AG in Stamford Connecticut.

‘Negatives’ Removed

“Some of the key negatives for the dollar are also off the table for political reasons,” Jalinoos said by telephone Sept. 27, citing less likelihood of increased government spending and the central bank ending its bond-buying program.

Gold, another traditional haven, retreated to $1,535 an ounce on Sept. 26, the lowest for a most-active contract in more than two months. Prices fell 11 percent in September, the biggest monthly drop since October 2008, after reaching a record $1,923.70 on Sept. 6.

“Dollar is safer than gold at the moment,” John Stephenson, who helps manage $2.6 billion at First Asset Management Inc. in Toronto and expects the metal to trade in the $1,600 to $1,700 range for the rest of the year, said in a telephone interview Sept. 27. “Dollar and dollar assets have been the ultimate safe-haven assets throughout this crisis.”

Commodities Decline

Silver’s monthly drop of 28 percent on the Comex in New York was the biggest since April 1980 and copper fell 24 percent in London, the biggest decline since October 2008. The only commodities in the S&P GSCI index to rise last month were live cattle, up 7.6 percent, lean-hog futures at 5.9 percent and feeder cattle at 7.7 percent.

Investors fled stocks last month, wiping out about $4 trillion from global equity markets. Benchmark measures for 28 out of 45 nations in the MSCI All-Country world Index posted declines of 20 percent or more from their peaks, meeting the common definition of a bear market, according to data compiled by Bloomberg. Among the countries with the 20 biggest losses from their highs, 18 are located in Europe.

Netflix Inc., the U.S. online and mail-order video service, led the MSCI All-Country World Index lower last month, dropping 52 percent, while Alpha Natural Resources Inc. plunged 47 percent. Netflix tumbled after Amazon.com Inc. and Microsoft Corp. unveiled competing products and its own rebranding alienated customers and drove away investors.

‘Risk Off’

“You heard all this talk of ‘risk off’ and that’s really what happened,” said Robert Carey, chief investment officer at First Trust Portfolios LP in a telephone interview Sept. 28. The Wheaton, Illinois-based firm oversees about $50 billion. “There are a lot of questions about long-term fiscal issues both in Europe and here in the U.S.”

European policy makers last week heard calls from U.S. Treasury Secretary Timothy F. Geithner, International Monetary Fund Managing Director Christine Lagarde and U.K. Chancellor of the Exchequer George Osborne to contain the region’s sovereign- debt crisis before it drives the global economy into recession.

“Patience is running out in the international community,” Osborne said. “The euro zone has six weeks to resolve this political crisis,” he said, referring to a meeting of Group of 20 leaders in Cannes France scheduled for Nov. 3-4.

“There’s been a change of attitude towards the dollar in the past quarter,” Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York, said in a telephone interview Sept. 30. “And it will continue as the final quarter of the year is going to be challenging to find a risk-on environment.”

--With assistance from Inyoung Hwang, Whitney Kisling and Debarati Roy in New York and Elizabeth Campbell in Chicago. Editors: Philip Revzin, Dave Liedtka

To contact the reporter on this story: Allison Bennett in New York at abennett23@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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