Dollar Optimism Drops to One-Year Low as Fed Dilutes Currency

By Ye Xie

April 15 (Bloomberg) -- Expectations for a weaker dollar increased to the highest level in a year after the Federal Reserve diluted the currency to lift the economy out of a recession, a survey of Bloomberg users showed.

Participants turned bearish on the dollar over the next six months for the first time since January, according to 1,349 respondents from Paris to New York in the Bloomberg Professional Global Confidence Index. They were most bullish on Brazil’s real since August and expected the Mexican peso to rally for the first time since January, as the Group of 20 nations pledged on April 2 to spend $1 trillion to revive global economic growth.

The Fed’s broad dollar index has declined 4.7 percent against 26 of the U.S.’s major trading partners, since touching a 4 1/2-year high on March 3. Fed Chairman Ben S. Bernanke joined central bankers in Japan, Switzerland and the U.K. on March 18 by printing money to buy debt assets after exhausting other monetary-policy tools. Bernanke said yesterday there are signs that the “sharp decline” in the U.S. economy is slowing.

“We are likely to see a gradual decline of the dollar,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, a survey participant. “The economic stimulus will pay off. Optimism has fed into commodities and commodities currencies at the expense of the dollar.”

‘Limited Upside’

The dollar weakened against 15 of the 16 most traded currencies in the past month, falling as much as 11 percent against New Zealand’s dollar. Only the yen fared worse, losing 1 percent versus the U.S. currency. The greenback depreciated a record 3.4 percent versus the euro on March 18, when the Fed unexpectedly announced a plan to buy as much as $300 billion of Treasuries and increase purchases of mortgage securities.

The index of expectations for the dollar fell to 42.87, a level last seen in April 2008, from 53.41 in March. The measure is a diffusion index, meaning a reading above 50 indicates participants expect the currency to appreciate. Participants were last bearish on the dollar in January, when the index dropped to 45.53. Bloomberg began compiling the data in December 2007.

“There’s limited upside for the dollar,” said Maxime Tessier, head of foreign exchange in Montreal at Caisse de Depot et Placement, which has C$120 billion ($98.7 billion) under management. “Since the beginning of the year, we’ve been gradually reducing our exposure to the dollar.”

Fiscal Stimulus

Participants’ confidence in the global economy rebounded to 21.2, the highest level since May 2008, from 8.49 in March, according to the Bloomberg survey. Expectations for the yield on 10-year Treasury notes to rise increased to 59.66, from 56.83 a month earlier.

Economic sentiment improved after global governments and central banks beefed up efforts to combat the worst economic crisis since the Great Depression. The U.S. government and the Fed have spent, lent or committed as much as $12.8 trillion to shore up the nation’s banking system and economy. In Japan, the government announced a record 15.4 trillion yen ($153 billion) stimulus package on April 10, bringing total spending to 25 trillion yen.

“I am fundamentally optimistic about our economy,” Bernanke said in Atlanta yesterday. “Today’s economic conditions are difficult, but the foundations of our economy are strong, and we face no problems that cannot be overcome with insight, patience, and persistence.”

Economists surveyed by Bloomberg News estimate the economy contracted 5 percent in the first quarter of this year, compared with an 6.3 percent annual rate in the final three months of 2008.

Brazil, Mexico

“We are fairly bearish on the dollar,” said Jonathan Xiong, who oversees $18 billion as vice president and senior portfolio manager at Mellon Capital Management Corp. in San Francisco. “Some of the risk aversion has decreased in the market place.”

Participants in Brazil turned upbeat on the real, with the index rising to 54.41, from 48.41 in March. The index for the Mexican peso climbed to 64.36 from 41.50.

The real gained 4.2 percent in the past month to 2.21 per dollar, while the peso advanced 10 percent to 13.24. The rally came after world leaders at the G-20 summit agreed to triple the amount the International Monetary Fund can lend to crisis- stricken countries and offered cash to revive trade. The peso also advanced as Mexico said on April 1 that it will seek a $47 billion credit line from the IMF to shore up its foreign reserves.

“I would see Brazil attractive if we do incorporate a strategy” of buying emerging-market assets, said Xiong.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net