|
Dollar may rally on higher interest rates { February 2006 } Original Source Link: (May no longer be active)
http://www.bloomberg.com/apps/news?pid=10000103&refer=us&sid=aG8WaKX9_Ps0http://www.bloomberg.com/apps/news?pid=10000103&refer=us&sid=aG8WaKX9_Ps0
Dollar May Rally for Second Week on Higher U.S. Rates (Update1)
March 13 (Bloomberg) -- The dollar may rally for a second week as investors seek yields that exceed those in Japan and Europe, a Bloomberg survey shows.
Fifty-two percent of the 52 traders, strategists and investors surveyed on March 10 from Sydney to New York advised buying the U.S. currency against the euro. Fifty-four percent recommended purchasing the dollar versus the yen.
The dollar had its broadest advance since August last week, gaining against the euro, yen, pound and at least 13 other currencies. Traders increased bets the Federal Reserve may boost interest rates three more times this year after growth in U.S. jobs and annual incomes surpassed analysts' forecasts. Yields on 10-year U.S. Treasury notes reached the highest since June 2004.
``This dollar rally is not over yet,'' said Benedikt Germanier, a currency strategist in Zurich at UBS AG, the second-biggest currency-trading firm in a Euromoney survey last year. ``The biggest investors are still putting their money in the U.S. and it's hard to stand in the way of that.''
The U.S. currency erased this year's loss against the yen, strengthening 2.3 percent last week to 119.01 on March 10. The dollar gained 1.1 percent to $1.1910 per euro, paring its decline this year against the common currency used by 12 members of the European Union to 0.5 percent.
Future Expectations
The U.S. currency may strengthen to $1.1750 per euro, Germanier said. UBS predicts the dollar will trade at $1.23 per euro in three months.
Bloomberg's weekly currency survey correctly forecasted the dollar's gain against the yen last week. Participants didn't anticipate the drop in the euro. The survey accurately predicted the dollar's direction in 30 of the past 54 weeks versus the euro and 27 weeks against the yen.
The median forecast of 53 analysts, traders and investors surveyed at the end of January said the dollar would end this quarter at $1.20 per euro and 117 yen.
``The dollar still looks robust against most of the major currencies,'' said Richard Yetsenga, a currency strategist at HSBC Holdings Plc in Hong Kong. ``As we get closer to the next Fed decision, the market's going to be tempted to price in more and more rate increases.''
Yield Advantage
Interest-rate futures show traders expect the Fed to lift its benchmark a quarter point to 4.75 percent when it meets on March 28 and to 5 percent by the end of June. Futures showed an almost 50 percent chance of a third increase to 5.25 percent by Sept. 30.
The yield advantage investors get on 10-year Treasuries compared with similar-maturity Japanese government bonds widened to 3.13 percentage points last week, the most in a year. U.S. notes yield 1.07 percentage points more than German 10-year debt and the gap between Fed and European Central Bank rates likely will return to 2.25 percentage points at month- end, matching the widest advantage since 2000.
Dollar bulls probably will discount a government report tomorrow that may show the U.S. current account deficit widened to a record in the fourth quarter, said Ryan Shea, a currency strategist at State Street Global Markets, a unit of the world's largest provider of investment services to institutions. Shea predicted the dollar will reach $1.1850 this week.
Europe's Outlook
``There's nothing to discourage the Fed from continuing to raise interest rates,'' said Shea, who is based in London. ``We could see some more dollar buying, particularly against European currencies.''
The dollar's gain against the euro may be limited as a report this week likely will show investor confidence in Germany, Europe's largest economy, rose in March, adding to speculation the ECB will raise rates to 3 percent this year. Europe's central bankers increased their benchmark by a quarter-point two weeks ago to 2.5 percent, the second increase in three months.
The Mannheim, Germany-based ZEW Center for European Economic Research's gauge of institutional and analyst expectations probably rose to 71, matching the highest in two years, from 69.8, the median forecast in a Bloomberg survey of economists shows.
`Hawkish Tone'
European Central Bank council member Axel Weber told the German parliament on March 9 that the risk of faster inflation hasn't diminished after the two rate increases.
``The ECB has struck quite a hawkish tone,'' said Jens Nordvig, a currency strategist in New York with Goldman, Sachs & Co. ``The market has moved to price in further rate increases.'' He expects the euro to rise to $1.25 in three months.
The yen may drop as investors pare expectations the Bank of Japan will follow the end of its deflation-fighting policy with an increase in interest rates, said Carsten Fritsch, a currency strategist at Commerzbank AG in Frankfurt.
The Bank of Japan signaled on March 9 that it will hold rates near zero percent for at least several months while ending its deflation fighting policy.
Bank of Japan Governor Toshihiko Fukui said Japan's economy is ``right on track,'' though the central bank hasn't decided on the timing of rate increases. ``It's too early to speak about rate hikes,'' he told reporters on March 12 in Basel, Switzerland, where he was attending a meeting of Group of 10 central bankers.
Japan's central bank will wait until the fourth quarter to raise its benchmark interest rate from near zero percent, according to 16 of 20 analysts surveyed by Bloomberg News.
|
|
