Feb. 8 (Bloomberg) -- For all the concern over the $1.6 trillion U.S. budget deficit and record debt load, the dollar is as valuable now as 35 years ago.
Measured against a basket of currencies from the Group of 10 nations proportioned by how they trade against each other, the greenback is up about 3 percent since 1975, according to Bloomberg Correlation-Weighted Currency Indexes. That was four years after the Bretton Woods agreement, set up in 1944 to link currencies to the price of gold, collapsed. The U.K. pound has dropped 34 percent and the Canadian dollar has fallen 6 percent.
The U.S. dollar gained 6 percent since November after losing 12 percent in the first 11 months of 2009 as measured by the Bloomberg index. Barclays Capital and Morgan Stanley say the U.S. will grow faster than the rest of the developed world this year and 2011.
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Purchases may continue to rise as investors seek refuge from growing sovereign credit risk in the euro area. The dollar “will benefit from relative liquidity of the U.S. Treasury markets,” Barclays Capital currency strategists led by
David Woo in London said in a Feb. 5 report.
Barclays Capital economists said in a report the same day that U.S. gross domestic product may grow 3.6 percent this year, versus 2.5 percent for the developed world, and 3.1 percent in 2011, compared with 2.6 percent elsewhere. Japan’s GDP may expand 1.9 percent this year, and the euro zone 1.3 percent, they said.
A day earlier, strategists at New York-based Morgan Stanley boosted their dollar forecast, saying it will strengthen to $1.24 per euro by year-end from its previous estimate of $1.32. It traded at $1.3638 today. The firm sees the U.S. currency gaining to 109 yen from 89.25 today, and rallying to $1.49 to the pound from $1.5612.
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Rather than a referendum on the U.S., the dollar may be rallying by default.
Nouriel Roubini, the New York University professor who predicted the credit crisis, said on Feb. 4 that the greenback may weaken for the next three years.
Moody’s Investors Service said last week the U.S. government’s Aaa bond rating will come under pressure unless additional measures are taken to reduce budget deficits projected for the next decade. The ratio of government debt to GDP and revenue increased “sharply” during the seizure in credit markets and recession, Moody’s said.
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“Under stress, people trust the U.S. to do the right thing,” said
Sebastien Galy, a currency strategist at BNP Paribas SA in New York. “The U.S. is a better bet.”
A global reserve currency must provide investors with the ability to invest, which requires liquid markets, and few capital controls, according to investors. China’s yuan can’t replace the dollar because it isn’t fully convertible and doesn’t float freely. The euro region and the markets for commodity currencies, such as the Australian, New Zealand and Canadian dollar, don’t have enough trading to absorb the amount of cash the reserve banks hold.
‘No Alternative’
“There is no alternative to the dollar, so it’s status as a reserve currency can’t be under threat,” said
Adam Boyton, a senior foreign-exchange strategist at Deutsche Bank AG in New York.
The dollar’s preeminence will remain intact, as it continues to be the most widely used currency in business and finance worldwide, the Federal Reserve Bank of New York said in a report released Jan. 5. Some $580 billion in banknotes, or 65 percent of all bills in circulation, were held outside the U.S. as of March 2009, according to Fed data.
The greenback has an 86 percent share of the foreign- exchange market, more than twice the euro’s 37 percent. Its share of the international debt market is 39 percent.
“The international role of the dollar remains substantial a decade after the introduction of the euro, and despite changes in the value of the dollar and the financial turmoil that began in 2007,”
Linda Goldberg, a vice president at the New York Fed, wrote in the report.
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“I would want to stay away from the euro, the euro zone and some of the emerging European currencies,”
Michael Gomez, the co-head of emerging markets at Pacific Investment Management Co., said on Feb. 4 at a conference in Moscow. The Newport Beach, California-based firm manages the world’s biggest bond
fund.
At their meeting this weekend in Iqaluit, Canada, Group of Seven finance ministers pledged to press ahead with economic stimulus measures. Canadian Finance Minister
Jim Flaherty told reporters that “we need to continue to deliver the stimulus to which we are mutually committed and begin looking at exit strategies to move to a more sustainable fiscal track.”
Yen Gains
Rather than using a weighted average of exchange rates based on trade data, which is reported on lag and subject to revision, the Bloomberg Correlation-Weighted Currency Indexes calculate weights based on variances in exchange rates.
The indexes have a start date of Jan. 2, 1975, and a base value of 100. The
dollar index rose 0.2 percent to 102.79 today and the
yen index climbed 0.2 percent to 396.22. The
Swiss franc index declined 0.2 percent to 270.57 and the euro index slipped 0.1 percent to 107.49. The index for the euro replicates the German deutsche mark before 1999, when Europe’s common currency started trading.
The
New Zealand dollar index fell 0.1 percent to 50.20 today, the
Swedish krona index was little changed at 52.83 and the
Australia dollar index dropped 0.2 percent to 64.09.
Though the dollar is the world’s reserve currency, it doesn’t affect the movement of foreign-exchange rates as much as the euro, the indexes show. Since the euro’s creation, its correlation to other G-10 currencies has steadily risen, overtaking the dollar in 2004 and all others by December 2008.
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22:51 EST
Weak Dollar Illusory as Correlated Trade Shows Gains (Update1) - Bloomberg.com