New York: After all the concern that the US is debasing its currency, the dollar beat stocks, bonds and commodities for the first time since May as investors sought refuge from slowing growth and Europe’s sovereign debt crisis.

The US currency rose 6% in September, according to IntercontinentalExchange Inc.’s Dollar Index, beating returns of 1.6% by Bank of America Merrill Lynch’s US Treasury Master Index. The MSCI All-Country World Index of stocks in 45 countries lost 8.9%, the largest monthly drop since May 2010. Raw materials measured by the Standard and Poor’s (S&P) GSCI Total Return Index of 24 commodities slid 12%.

Gaining ground: The dollar reached 1.3314 per euro, the strongest since 18 January, and 77.27 yen, the highest since 15 September, on Monday.

“In a time of crisis, you want to be holding the most liquid currency out there," Aroop Chatterjee, a currency strategist at Barclays Capital Inc. in New York, said in a telephone interview on 27 September. “It waters down the argument for ‘the end of the dollar as a reserve currency’."

Strategists reduced forecasts for the euro versus the dollar and sterling by the most since June 2010 last month. Predictions the Canadian dollar will gain against the greenback dropped the most since October 2008.

Bullish contracts

Hedge funds and other large speculators who had held an aggregate bet the dollar would weaken for 14 months capitulated, with more wagers on gains than losses for the first time since July 2010. Traders added the most bullish contracts in the week ended 20 September since January 2010.

Trades that expect the dollar to strengthen against the euro, yen, pound, Swiss franc and Mexican peso, as well as the Australian, Canadian and New Zealand dollars, surged to 128,155 on 27 September, according to Commodity Futures Trading Commission data as compiled by Bloomberg.

The dollar strengthened 0.8% to $1.3387 per euro last week, extending its September advance versus the 17-nation currency to 6.8%, bringing its gain for the third quarter to 7.7%. The greenback appreciated 0.6% to 77.06 yen in the five days ended 30 September, reducing its loss since June to 4.5%.

Broad increase

The Dollar Index, which tracks the currency against those of six trading partners, had the biggest monthly increase since October 2008, reaching 79.154 on Monday, the highest level since 20 January. The US currency rose 8.2% against nine developed nation counterparts in September, according to the Bloomberg Correlation-Weighted Indexes, the biggest gain since October 2008.

On Monday, the dollar reached $1.3314 per euro, the strongest level since 18 January. It touched 77.27 yen, the highest level since 15 September.

The dollar’s 5.7% increase in the third quarter was topped only by treasuries, which rallied 6.4%, according to Bank of America Merrill Lynch data. Sovereign debt in the rest of the world returned 3.15%, and AAA-rated US corporate bonds gained 6.4%. The MSCI Index of stocks fell 18% and S&P’s commodity index slumped 12%, the biggest quarterly decline since the three months ended in December 2008.

Swiss franc, yen

Investors turned to the dollar as Switzerland and Japan intervened to stem gains in their currencies. The Swiss National Bank announced on 6 September it would purchase “unlimited quantities" of foreign currencies to prevent the franc from strengthening beyond 1.20 per euro.

Bank of Japan sold 4.51 trillion yen ($58.5 billion) in the biggest move in seven years in August, as the currency reached a post World War II-record of 75.95 per dollar on 19 August.

“The dollar’s strength is as much by default as its own virtues," said Alan Ruskin, global head of Group-of-10 foreign exchange strategy at Deutsche Bank AG in New York by telephone on 27 September. “The dollar has attracted funds because there’s nowhere else to go with that kind of liquidity," and the US isn’t fighting dollar gains, he said.

Carry trades

Investors exited higher-risk assets by unwinding so-called carry trades, which use borrowings in currencies of nations such as the US with low interest rates to buy assets in economies with higher yields, as volatility soared. The strategy lost 6.6% in September, the most since at least 1998, when records began, according to an index compiled by UBS AG.

Implied volatility among major currencies reached the highest level since May 2010, according to the JPMorgan Chase and Co.’s Global FX Volatility Index.

The dollar makes up a 60.2% share of the world’s currency reserves, more than double the 26.7% for the euro, which has the next biggest portion, according to the International Monetary Fund in Washington.

While S&P had used the dollar’s position to reaffirm its AAA rating in April, the company cited the weakening “effectiveness, stability and predictability of American policymaking and political institutions", in its 5 August downgrade of the US.

Calculation error

S&P cut the rating by one step even after US treasury department officials told the firm it had overestimated future national debt by $2 trillion. S&P, a unit of New York-based McGraw-Hill Cos., said the error didn’t affect its decision. The company announced on 23 August that it would replace president Deven Sharma with Citibank NA chief operating officer Douglas Peterson.

A Bloomberg survey of 1,031 subscribers found that 57% of US investors agreed with S&P’s decision, compared with about 75% of those in Europe and Asia. The quarterly review showed that 72% of US investors found the nation’s creditworthiness good or excellent, while 45% of Europeans and 42% of Asians agreed.

While most of those polled backed S&P’s downgrade, 35% of investors said the overall the grades given by rating firms aren’t reliable. Only 1% called them very reliable, 18% fairly reliable, and 45% just somewhat reliable.

Ratings affirmed

Moody’s Investors Service and Fitch Ratings affirmed their top rankings on 2 August, and Warren Buffett, the world’s most successful investor, said the US should be rated “quadruple A" rather than AA+. The US Securities and Exchange Commission has also sent subpoenas to hedge funds as part of an investigation into whether some investors traded on confidential tips ahead of the downgrade.

Republican senate minority leader Mitch McConnell of Kentucky and House speaker John Boehner of Ohio wrote Fed chairman Ben S. Bernanke a letter on 20 September urging him to refrain from more stimulus to avoid “further harm" to the economy.

Texas governor and leading Republican presidential candidate Rick Perry in August said additional measures from Bernanke would be “almost treacherous—or treasonous". China, Germany and Brazil last year said the US central bank was weakening the dollar to help exports.

The complaints may have helped the currency by narrowing policy options, said Shahab Jalinoos, a senior currency strategist for UBS in Stamford, Connecticut.

‘Negatives’ removed

“Some of the key negatives for the dollar are also off the table for political reasons," Jalinoos said by telephone on 27 September, citing less likelihood of increased government spending and the central bank ending its bond-buying programme.

Gold, another traditional haven, retreated to $1,535 an ounce on 26 September, the lowest for a most-active contract in more than two months. Prices fell 11% in September, the biggest monthly drop since October 2008, after reaching a record $1,923.70 on 6 September.

“Dollar is safer than gold at the moment," John Stephenson, who helps manage $2.6 billion at First Asset Management Inc. in Toronto and expects the metal to trade in the $1,600-1,700 range for the rest of the year, said in a telephone interview on 27 September. “Dollar and dollar assets have been the ultimate safe-haven assets throughout this crisis."

Commodities decline

Silver’s monthly drop of 28% on the Comex in New York was the biggest since April 1980, and copper fell 24% in London, the biggest decline since October 2008. The only commodities in the S&P GSCI index to rise last month were live cattle, up 7.6%, lean-hog futures at 5.9% and feeder cattle at 7.7%.

Investors fled stocks last month, wiping out about $4 trillion from global equity markets. Benchmark measures for 28 out of 45 nations in the MSCI All-Country World Index posted declines of 20% or more from their peaks, meeting the common definition of a bear market, according to data compiled by Bloomberg. Among the countries with the 20 biggest losses from their highs, 18 are located in Europe.

Netflix Inc., the US online and mail-order video service, led the MSCI All-Country World Index lower last month, dropping 52%, while Alpha Natural Resources Inc. plunged 47%. Netflix tumbled after Inc. and Microsoft Corp. unveiled competing products and its own rebranding alienated customers and drove away investors.

‘Risk off’

“You heard all this talk of ‘risk off’ and that’s really what happened," said Robert Carey, chief investment officer at First Trust Portfolios LP in a telephone interview on 28 September. The Wheaton, Illinois-based firm oversees about $50 billion. “There are a lot of questions about long-term fiscal issues both in Europe and here in the US."

European policymakers last week heard calls from US treasury secretary Timothy F. Geithner, International Monetary Fund managing director Christine Lagarde and UK chancellor of the exchequer George Osborne to contain the region’s sovereign-debt crisis before it drives the global economy into recession.

“Patience is running out in the international community," Osborne said. “The euro zone has six weeks to resolve this political crisis," he said, referring to a meeting of Group of Twenty leaders in Cannes France scheduled for 3-4 November.

“There’s been a change of attitude towards the dollar in the past quarter," Andrew Wilkinson, chief economic strategist at Miller Tabak and Co. Llc in New York, said in a telephone interview on 30 September. “And it will continue as the final quarter of the year is going to be challenging to find a risk-on environment."