Dollar Bottom Proves Elusive as G-7 Meets, Bearish Bets Double

By Bo Nielsen


April 7 (Bloomberg) -- Optimism for a dollar rebound that pervaded the currency market at the start of the year is fading.

Futures traders doubled bets against the greenback in the past two months, data from the Commodity Futures Trading Commission in Washington show. Citigroup Inc., Deutsche Bank AG and Royal Bank of Scotland Group Plc, which handle almost 40 percent of global foreign exchange trading, say the currency may slump to $1.65 per euro by October, from $1.57 on April 4.

While the dollar rose April 1 when UBS AG and Lehman Brothers Holdings Inc. said they're raising $19 billion to shore up their capital, it retreated for the rest of the week after Federal Reserve Chairman Ben S. Bernanke acknowledged for the first time that a recession is possible. Officials of the Group of Seven nations meet this week in Washington, and are unlikely to agree on a plan to boost the currency because rising exports may be the only blessing of a weak currency in a weakening economy.

``The dollar will continue to move lower in the next couple of months until the U.S. economy improves markedly,'' said Adam Boyton, senior currency strategist in New York at Deutsche Bank.

The Dollar Index, which measures the currency against six of its main counterparts, tumbled the past two months after trading little changed between October and mid-February. It's down 6.2 percent in 2008, after dropping 8.3 percent in each of the past two years.

Futures traders have grown more bearish, as three Fed interest rate cuts in 2008 totaling 2 percentage points reduced demand for U.S. deposits. They amassed a net total of 246,101 futures contracts betting on a dollar decline versus eight other currencies, up from 126,342 on Jan. 22, CFTC data show.

Relative Rates

Dollar-denominated deposits hold little appeal after the Fed lowered its target rate for overnight loans between banks to 2.25 percent. That's the second-lowest among the G-7 after Japan's 0.5 percent. The European Central Bank will keep its rate at 4 percent at its April 10 meeting, a Bloomberg survey shows.

``We are close to a tipping point where, I mean, the willingness to hold dollars is definitely impaired,'' billionaire George Soros, 77, said in an interview in New York on April 3. His bet against the British pound in 1992 helped drive the U.K. out of Europe's system of linked exchange rates.

Foreign private investors sold a net $37.6 billion of U.S. stocks and bonds in the six months ended Jan. 31, the most recent Treasury Department data show. The last time sales exceeded purchases over a six-month period was April 1996.

Two-year Treasuries yield 1.65 percentage points less than similar-maturity German bunds. As recently as October they were the same. Over the past decade, the U.S. notes yielded an average of 0.51 percentage point more than bunds.

Dollar Reprieve

The U.S. currency received a reprieve last week. The dollar rose 0.4 percent against the euro and 2.2 percent to 101.47 yen as the recapitalization plans by UBS and Lehman Brothers boosted investor confidence in financial institutions shaken by $232 billion of losses and writedowns from the freeze in capital markets.

``The dollar is bottoming out,'' said Benedikt Germanier, a currency analyst in Stamford, Connecticut, at UBS, the second- biggest currency trader after Deutsche Bank. It may rise to $1.45 per euro by June, he said.

The median of 41 estimates in a Bloomberg News survey is for the dollar to appreciate to $1.51 per euro by Sept. 30 and to $1.48 at year-end as the U.S. economy recovers and Europe slows.

Cutting Estimates

``The U.S. economy is deteriorating so fast that it's hard to believe economies outside of the U.S. won't get affected,'' said Tom Fitzpatrick, global head of currency strategy at Citigroup in New York. ``As the slowdown in the U.S. reverberates to Europe, the ECB can't be sitting this one out. They have to cut,'' which may limit dollar losses, he said.

Analysts have predicted a rebound before only to be proven wrong. At the start of 2008, they expected the dollar to gain to $1.48 per euro by June and reach 110 yen, according to Bloomberg surveys. They now see it at $1.55 to the euro and 98 yen.

And even though the dollar rallied last week, it declined April 4 as the Labor Department said payrolls fell for a third straight month in March.

Citigroup predicts it will depreciate to $1.65 per euro next quarter, compared with an earlier forecast of $1.51. Deutsche Bank's Boyton and Adrian Schmidt, a senior currency strategist at Edinburgh-based RBS, say it may reach that level by July.

Exports Rise

``It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly,'' Bernanke said in testimony to Congress's Joint Economic Committee on April 2. The central bank chairman also predicted the U.S. will recover in the second half.

U.S. growth likely declined to a 0.2 percent annual pace last quarter, the weakest since 2002, according to the median forecast of 85 economists in a Bloomberg survey.

Deutsche Bank revised its six-month euro forecast to $1.55 in March, from $1.41 in February. RBS, the fourth-biggest currency trader, sees it at $1.57 on June 30, compared with an earlier estimate of $1.47.

The weakening dollar is making American goods cheaper abroad, giving U.S. officials less incentive to halt the currency's depreciation. Exports rose 1.6 percent in January to a record, according to the Commerce Department.

G-7 Meets

Foreign sales contributed 1.02 percentage points to gross domestic product in the fourth quarter, compared with 0.85 percent the previous year, government data show. Without the improvement in trade, the economy would have contracted at a 0.4 percent annual pace, the first decline since the last recession in 2001, instead of expanding 0.6 percent.

The G-7 -- the U.S., Japan, Germany, the U.K., France, Italy and Canada -- hasn't intervened in currency markets since supporting the euro in 2000. They are unlikely to buy or sell currencies to prop up the dollar after meeting April 11, according to Deutsche Bank, Citigroup and Bank of America Corp. in Charlotte, North Carolina.

In a statement following their Feb. 9 session in Tokyo, the group said ``excess volatility and disorderly movements in exchange rates are undesirable.'' The dollar has fallen 8 percent against the euro since then.

``For verbal intervention or actual intervention to work you need some substantive policy behind it and the last thing you will see right now is a monetary tightening by the Fed,'' said Robert Sinche, head of global currency strategy at Bank of America. He expects the dollar may fall past $1.60 per euro this quarter.