New York: The dollar posted its first monthly gain since June versus the currencies of major US trading partners as the US Federal Reserve moved closer to withdrawing stimulus measures that helped cause the currency to fall 4.2% for the year.
The dollar on Thursday advanced to a three-month high against the yen and rallied versus the euro after the Fed said at the conclusion of its 16 December meeting that job losses are abating. The currency pared its annual fall against the Australian dollar and Norwegian krone as a surge in treasury yields made the US currency less attractive as a funding vehicle for the purchase of higher yielding assets.
“We are seeing the dollar recover probably into the first quarter of next year,” said Thanos Papasavvas, who helps manage more than $5 billion (Rs23,350 crore) in London, in an interview on Bloomberg Radio. “We would expect the unemployment rate to start to stabilize.”
The trade-weighted Dollar index, which the ICE futures exchange uses to track the greenback against currencies including the euro, yen and pound, increased 4% in December to 77.86 on Thursday. It was the first monthly advance in six months and the biggest gain since January 2009.
Moving up: The dollar rose 4.8% to 1.4321 per euro on 31 Dec, from 1.5005 at the end of November, trimming its loss over the year to 2.5%. Hemant Mishra / Mint
The index finished the decade down 24% as US dominance of the global economy diminished and emerging markets grew. The introduction of the euro in January 1999 created an alternative to the dollar as a global reserve currency.
The US currency’s share of foreign reserves held by global central banks dropped to 61.6% during the quarter ended 30 September, the lowest on record, from 71% a decade ago, the International Monetary Fund reported on 30 December. The euro’s share rose to 27.7%, from 17.9%.
“You might get periodic episodes of a little bit of dollar strength,” said Tom Fitzpatrick, chief technical analyst at Citigroup Inc. in New York, in an interview on Bloomberg Radio. “But we really don’t feel any of the underlying parameters for dollar weakness has changed that much.”
The dollar appreciated 4.8% to $1.4321 per euro on 31 December, from $1.5005 at the end of November, paring its loss in 2009 to 2.5%. The US currency advanced 7.7% to 93.02 yen, from 86.41, and gained 2.6% for the year. It touched 93.15 on Thursday, the highest level since 7 September. The euro increased 2.7% to 133.20 yen in December and advanced 5.1% in 2009.
Barclays Plc, the world’s third largest currency trader, raised its three-month forecast for the dollar against the euro on 10 December to $1.45 from $1.52 and its six-month outlook to $1.40 from $1.45.
The median forecast of 43 economists surveyed by Bloomberg News is for the dollar to trade at $1.51 by the end of March and $1.49 by 30 June. The dollar will trade at 90 yen by the end of March and 93 in six months, according to economists.
The yen was the only major currency to fall against the dollar for the year, weakening on speculation the Fed will phase out stimulus measures while the Bank of Japan steps up efforts to fight deflation.
The yield premium on 10-year treasury notes over similar-maturity Japanese bonds rose on Thursday to the highest level in more than two years, making US assets more attractive than Japan’s securities.
The Brazilian real, South African rand, the Australian and New Zealand dollars and the Norwegian krone were the best performers against the dollar in 2009 among major currencies, rising at least 20% as signs of global recovery spurred investors to sell dollars and buy higher-yielding assets.
Buying the five currencies with funds borrowed in the dollar and yen would have returned 34% in 2009, according to Bloomberg data. The same trade would have lost 26% in 2008.
The Aussie and krone fell in December against the dollar after the US labour department reported the fewest monthly job losses since before the recession, fuelling speculation the Fed will remove stimulus measures and prepare investors for higher interest rates in 2010.
The Fed held the target rate for overnight lending between banks at zero to 0.25% on 16 December while saying economic activity has continued to pick up.
Futures trading in Chicago showed on Thursday a 62% chance that the Fed will raise its target lending rate by at least a quarter percentage point by its June meeting, up from 31% odds a week ago.