Dollar Bears Turn Bullish With Fed Near End of Cuts (Update1)

By Bo Nielsen


May 14 (Bloomberg) -- The U.S. dollar will strengthen against most major currencies in the next six months as the Federal Reserve stops reducing interest rates, a survey of Bloomberg users showed.

The end of rate cuts will boost the allure of American assets for international investors, according to U.S. respondents in the monthly Bloomberg Professional Global Confidence Index, which questioned 3,447 users from Chicago to London to Hong Kong. While users in the U.S. grew optimistic about the greenback, participants in Germany and France became pessimistic about the euro for the first time since the survey started in November.

After declining 15 percent in the previous 12 months to a record low 70.698 on March 17, the Dollar Index traded on ICE Futures in New York that compares the currency to those of six trading partners has risen 3.8 percent to 73.399. The median estimate of 54 economists surveyed by Bloomberg is for the Fed to keep its target rate for overnight loans between banks at 2 percent through March, while the European Central Bank lowers its main rate by half a percentage point to 3.5 percent.

``The broad-based dollar weakness, which has been the trend the last few years, has ended,'' said Paresh Upadhyaya, who helps oversee about $50 billion in currency assets at Putnam Investments in Boston and participated in the survey.

The index of expectations on the dollar for U.S. users rose to 57.6 for May from 42.87 in April and 30.3 in March. The measure is a diffusion index, meaning a reading above 50 indicates participants expect the currency to appreciate. Users in Germany registered 46.3, down from 56.25 in April and 61.85 the prior month.

Interest Rate Expectations

The Fed cut rates a quarter-percentage point to 2 percent on April 30 and said ``substantial'' easing since September would help foster economic growth.

``What we needed to see for the U.S. dollar to rally was the end in sight of the Fed easing cycle,'' said Camilla Sutton, co-head of currency strategy at Scotia Capital Inc. in Toronto, who has participated in past surveys.

Users in the U.S. are starting to anticipate that the federal funds rate will increase, with a reading of 51.3, compared with 27.74 in April. Their view on the U.S. economy improved to 15.69 from 10.55 in April.

Participants in Germany continued to forecast ECB rate cuts. The index that measures expectations for borrowing costs was little changed at 38.1 from 37.38 last month.

Treasuries, Bunds

The dollar gained 3.5 percent versus the euro since reaching a record low of $1.6019 on April 22 as the advantage in yields on two-year German bund over Treasuries of similar maturity narrowed 0.43 percentage point to 1.41 percent from 1.84 percent on March 31. The U.S. currency traded at $1.5460 at 3:17 p.m. in New York, from $1.5474 yesterday.

Participants in Brazil are the most bullish on their currency, at 71.54. The real has increased 22 percent this year versus the dollar and is the biggest gainer among the 16 most actively traded currencies. The real fell 0.4 percent to 1.6630 per dollar, from 1.6557 yesterday.

Brazil received an investment grade credit rating on April 30 for the first time from Standard & Poor's, sending the Bovespa stock index to a record high and yields on dollar- denominated bonds to an all-time low.

Yen Outlook Cools

Users in Japan were less optimistic about the yen, with a reading of 51.96, down from 61.39 in April. The currency traded at 105.27 yen per dollar after reaching 95.76 on March 21, the strongest in 13 years. It was little changed at 162.74 against the euro.

The Japanese currency gained 6.1 percent against the dollar in the last six months, fueled by losses in U.S. credit markets. Investors reduced so-called carry trades by selling high- yielding assets around the world financed with loans in Japan, which has the lowest interest rates among the Group of Seven countries. Speculators need to buy yen to end the trades.

``There's some caution still about carry,'' said Michael Metcalfe, the London-based head of macro strategy at State Street Global Markets, a unit of the world's largest money manager for institutions. ``If risk appetite proves durable, carry will come back.''

Japanese users were less optimistic about the yen than currency analysts. The median estimate of 40 strategists in a Bloomberg survey is for the yen to strengthen to 101 against the dollar and to 150 per euro by the end of March.