Dollar Slide Will Halt on ‘Aggressive’ Fed, BT Investment Says

By Candice Zachariahs

Dec. 3 (Bloomberg) -- The U.S. dollar will extend its drop versus the euro and reach parity with Australia’s dollar in 2010 before “aggressive” interest-rate increases by the Federal Reserve boost the greenback, BT Investment Management said.

The U.S. dollar has weakened against all 16 of the most- traded currencies this year as unemployment surged to the highest since 1983 and the Federal Reserve pledged last month to keep interest rates near zero for an “extended period.” Current rates make the dollar a favorite in carry trades where low-cost funds are used to invest in higher-yielding assets.

“Given the Fed’s stance on raising rates and where the economy is at the moment, I don’t think we’ll see a real strong growth in the U.S. dollar again until mid to late next year,” said Joe Bracken, who oversees A$4 billion ($3.7 billion) as head of macro strategies at BT Investment Management in Sydney. “Once the growth really comes back, the Fed will be very, very worried indeed about this growth translating into inflation and they will very quickly raise rates.”

The Fed increased its target rate in 17 consecutive quarter-point moves between June 2004 and June 2006 in the longest series of increases without a pause or cut since the FOMC began announcing the direction of target rates in 1994. That’s the year the central bank began another series of increases that took the benchmark rate from 3 percent before the first increase in February to 6 percent a year later.

Growth Story

“The Fed will be pretty aggressive in putting rates back up, that’s what history tells us,” Bracken said. “Once they start to do that, Treasuries will get creamed and the carry trade will reverse pretty quickly.”

The U.S. dollar has fallen 16 percent against the euro over the past 12 months and traded at $1.5091 as of 12:39 p.m. in Tokyo. It has lost 30 percent versus Australia’s dollar over the same period to trade at 92.96 U.S. cents per Aussie.

Bracken said his currency portfolio has returned 15 percent over the past 12 months. The fund invests in currencies that provide “diversification benefits” including the U.S., Canadian and Australian dollars, euro, yen, pound, Brazil’s real, the Korean won and South Africa’s rand, he said.

The fund is bullish on the Australian and Canadian dollar, Brazil’s real and the Korean won, according to Bracken. It also has a so-called long position in the yen, which provides a “very good buffer” against any ebbing in risk appetite, he said. A long position profits when an asset rises.

“The growth story has some legs particularly in Southeast Asian countries,” Bracken said. “Aussie dollar as a commodity currency, as a risk currency, as a carry-trade currency continues to have a lot of legs and you’ll probably see it approach parity with the U.S. dollar. It’s a very similar story for the Canadian dollar.”

Against the U.S. dollar, the Brazilian real is the best- performer among the 16 most-traded currencies over the past 12 months followed by the Australian dollar. Korea’s won is the sixth biggest-gainer and Canada’s dollar the ninth.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net