Dollar Pessimism Highest in 18 Months as Growth Outlook Rises

By Matt Townsend

Sept. 16 (Bloomberg) -- Investors turned the most bearish on the dollar in 18 months as signs of a recovery in the global economy reduced demand for the currency as a refuge, a survey of Bloomberg users showed.

The world’s main reserve currency will fall and Treasury yields will rise over the next six months, according to 1,851 respondents in the Bloomberg Professional Global Confidence Index. Their outlook on the economy improved for a second month, after saying it worsened every month since the index began in November 2007.

The U.S. Dollar Index fell yesterday to the lowest level in a year as a decline in foreign-exchange price swings encouraged investors to borrow the currency at record low interest rates to finance the purchase of assets in countries offering yields as much as 8.1 percentage points higher than deposit rates in America.

“You’ve had a lot of people being in the dollar that are going to exit when it isn’t a necessity as a safe haven,” said Fabian Eliasson, a survey participant and head of U.S. currency sales at Mizuho Corporate Bank Ltd. in New York. Eliasson said he expects the dollar to weaken.

Sentiment toward the greenback fell to 30.8 in September, from 38.8 in August, according to the survey. The reading is the lowest since it dropped to 30.3 in March 2008, and has tumbled from a high of 68.86 a year ago. The measure is a diffusion index, meaning a reading below 50 indicates Bloomberg users expect the dollar to weaken.

Dollar Losing Ground

Prospects for an improving global economy rose to 58.5 from 58.1 in August and a low of 3.99 in October 2008.

Using the dollar to finance purchases of assets outside the U.S. will continue until the Federal Reserve raises borrowing costs to curb inflation, Eliasson said. Borrowing costs in dollars as measured by London interbank offered rates fell below those of yen for the first time since 1993 in the past month.

“Next year you are going to have to start to think about raising interest rates,” Eliasson said. “Until then, you are going to have people borrowing in dollars.”

Fed policy makers won’t raise their target rate for overnight loans between banks, currently a range of zero to 0.25 percent, until the third quarter of 2010, according to the median estimate of 57 economists surveyed by Bloomberg.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against the euro, yen, U.K. pound, Canadian dollar, Swiss franc and Swedish krona, gained 17 percent from Sept. 15, 2008, to March 5, 2009, as investors sought the safety of U.S. assets following the collapse of Lehman Brothers Holdings Inc.

It has since fallen about 14 percent, touching 76.187 today, the lowest since Sept. 23, 2008.

Yen Sentiment Rises

Spain and Mexico were the only countries of the nine surveyed outside the U.S. where users expected their currencies to decline against the dollar in the next six months. Sentiment toward the euro in Spain decreased to 48.4 from 52.4. The index for the Mexican peso increased to 45.4 from 40.8 in August.

Users in Japan raised their outlook on the yen for the first time in three months, as sentiment improved to 62.11 from 50.31. Japan’s currency rallied against 15 of its 16 most-traded counterparts in August on speculation the Democratic Party of Japan will be more tolerant of a stronger yen than its predecessor, the Liberal Democratic Party, as it tries to increase consumer demand to spur economic growth.

Hirohisa Fujii, who was appointed finance minister today, said he doesn’t support “a weak yen.” Current yen movements “aren’t excessive” and the currency is “just moving gradually,” Fujii told reporters in Tokyo.

Real, Pound

Survey participants in Brazil were the most upbeat, with optimism toward the real rising to 70.83, from 69.44 last month. The real has gained 28 percent this year to $1.8037 per dollar, the second-best performer among the 16 most-traded currencies tracked by Bloomberg after the South African rand’s 29 percent gain.

In the U.K., users turned less bullish on the pound after it gained 13 percent this year versus the dollar and 7.7 percent against the euro. The sentiment index for sterling fell to 54.3 from 62.04.

While investors in Treasuries have lost 3.21 percent this year on average, they have earned 1.3 percent since June, according to Merrill Lynch & Co. indexes. Sentiment toward the U.S. economy stayed at 47.3 after gaining four out of the past five months, from 5.2 in March.

Bond Yields

The prospect for an increase in 10-year Treasury note yields rose to 66.2 in September, from 64.8 a month earlier. In June, the index reached to 73.7, the highest since Bloomberg began compiling the data in November 2007. The yield on the benchmark 10-year note ended yesterday at 3.45 percent, down from the high this year of 4 percent in June.

“For bond yields to go back to four percent, we have to be in the same kind of euphoric state we were in June,” said Suvrat Prakash, a survey participant and a interest-rate strategist in New York at BNP Paribas Securities Corp. “The likelihood of a V-shaped recovery in June looked much better than now. We’ve seen a bit of a plateau and there is a lot of doubt about the consumer.”

For 10-year German bunds, expectations for higher yields rose to 75 from 68.7 after Europe’s largest economy grew in the second quarter following a year of contraction.

Survey participants said the global economy is improving as France, Europe’s second-largest economy, started to recover in the second quarter and China’s economy, the world’s third largest, strengthened as industrial production, lending and retail sales exceeded forecasts.

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net