Dollar Optimists Return as Slowdown Spreads to Europe, Japan

By Lester Pimentel

Aug. 13 (Bloomberg) -- The dollar will appreciate against the euro, yen, pound and Swiss franc in the next six months as economies in Europe and Asia falter, a survey of Bloomberg users showed.

U.S. investors turned bullish on the greenback after incorrectly forecasting a decline last month, according to respondents in the monthly Bloomberg Professional Global Confidence Index, which questioned 2,969 users from Los Angeles to Paris to Tokyo. Participants became bearish on the franc and yen while growing more pessimistic about the British pound.

``It's not that people are more optimistic about the U.S. economy,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York and a survey participant. ``The rest of the world is catching up with the U.S.''

European Central Bank President Jean-Claude Trichet said Aug. 7 that the region's economy will be ``particularly weak'' through the third quarter. The Federal Reserve said Aug. 5 that a shrinking labor market and banking strains will hinder U.S. growth. Japan's government said Aug. 6 the economy is ``deteriorating,'' acknowledging for the first time that the country's longest postwar expansion has probably ended.

The index of expectations on the dollar for U.S. users rose to 57.48 for August from 45.44 in July. A reading above 50 indicates participants expect the currency to appreciate.

Dollar Index

The U.S. Dollar Index, which tracks the currency against six trading partners, yesterday touched 76.616, the highest level since Feb. 12. The index has advanced 3.9 percent since July 31. Last week's 3.3 percent gain was the biggest since January 2005.

``We continue to remain bullish on the dollar,'' said Matthew Strauss, a senior currency strategist at RBC Capital Markets Inc. in Toronto, and a survey participant. ``There are still significant hurdles ahead for the U.S. economy. But we see increasing deterioration for the rest of the world.''

He expects the euro will weaken to $1.38 by the end of the year from $1.49 yesterday and the record high of $1.6038 on July 15. Against the yen, the dollar ended yesterday at 109.54, up 14 percent from the low this year of 95.76 yen on March 17.

Gains may prove temporary, based on trading patterns and the U.S. current account deficit, according to strategists from Charlotte, North Carolina-based Bank of America Corp. to Morgan Stanley in New York.

Relative Strength

The 14-day relative strength index measuring the pace of the euro's decline fell to 20.05 on Aug. 11, the lowest level since the currency's debut in 1999. A reading below 30 suggests a currency's drop is extreme and a reversal may be imminent.

The current account deficit, the broadest measure of trade, was $176.4 billion in the first quarter, compared with the average shortfall of $100 billon since 1993, the Commerce Department's most recent data show.

In Switzerland, the outlook for the franc tumbled to 42.50 from 59.37. The index for the yen declined to 49.19 from 55.08, while U.K. users increased bets against the pound, with the index falling to 37.73 from 42.41.

The dollar is getting a boost from speculation that lower commodities prices will boost consumer spending. The UBS Bloomberg Constant Maturity Commodity Index fell 18 percent to 1,406.104 yesterday from a record 1,714.362 on July 2. It rose 50 percent in the prior 12 months.

Fed Forecast

Users in the U.S. forecast the Fed will increase its target interest rate for overnight loans between banks from 2 percent. The index measuring the outlook for the federal funds rate was 57.33 for August, compared with 57.35 in July. Their views on the economy became less bearish, with the index climbing to 16.74 from 8.77.

Higher short-term deposit rates can make a country's fixed- income holdings more attractive for international investors, bolstering demand for the currency. The dollar depreciated 12 percent against the euro between Sept. 18 and April 30 as the Fed cut the fed funds rate to 2 percent from 5.25 percent and the ECB kept its equivalent unchanged at 4 percent.

Users became less certain 10-year Treasury yields will rise as the sentiment index fell to 65.26 from 66.72 in July. The yield on the benchmark 10-year note declined 9 basis points, or 0.09 percentage point, yesterday to 3.91 percent in New York, according to BGCantor Market Data.

Yields increased from this year's low of 3.28 percent on March 17 on speculation the combination of Fed rate cuts and rising commodity prices would spark inflation.

In Germany, the index measuring bund yields dropped to 53.85 from 60.83. Users in Japan cut their outlook for higher yields, as the index declined to 50.41 from 56.64.

U.K. users turned bullish on gilts, with the index falling to 48.93 from 53.83. Property values fell the most in at least a quarter of a century in July, HBOS Plc reported on Aug. 7.

Participants in Switzerland became less certain the Swiss National Bank will raise its benchmark rate from 2.75 percent. The index that measures expectations for short-term borrowing costs fell to 55.42 in August from 65.11.

To contact the reporter on this story: Lester Pimentel in New York at lpimentel1@bloomberg.net