U.S. dollar’s gains may end in the middle of 2010 as central banks shy away from adding greenbacks to their reserves and the Federal Reserve raises rates at a slower pace than investors expect, Barclays Plc said.
Long-term demand for dollars is set to weaken after the currency’s share of global reserves added in the third quarter slid to less than 30 percent, a decline “unprecedented in a period of U.S. dollar weakness,” Barclays said in a note to clients. The dollar stemmed 11 months of declines versus the 16 most-traded currencies in December, gaining against all but two, after investors increased bets the Fed will remove monetary stimulus next year as the economy recovers.
“We see the dollar strengthening in the first six to nine months of 2010 when the focus is on liquidity withdrawal and tightening of rates,” said Steven Englander, chief U.S. currency strategist at Barclays in New York, in a telephone interview. “Once the market gets past this initial fear of tightening, the reality will be that the Fed isn’t going to be tightening very fast and we’ll see dollar selling again.”
The Dollar Index -- which measures the currency against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona -- has dropped 4.2 percent this year. It has climbed 4.1 percent in December and traded at 77.928 as of 9:28 a.m. in Tokyo. The U.S. dollar has registered its biggest declines against the Brazilian real, Australian dollar and South African rand dropping by more than 25 percent this year against each.
Global reserves probably gained by about $180 billion in the third quarter with U.S. dollar-denominated reserves accounting for about $50 billion or less than 30 percent, Barclays estimated, using data from the International Monetary Fund and U.S. official reports.
The bank adjusted for changes in the value of currencies over that period to capture “actual buying and selling, rather than passive gains and losses” Englander wrote in the note.
The dollar declined against all but the yen among the 16 most-active currencies this year. That prompted China and Russia, holders of the world’s biggest and third-biggest currency reserves, to express concern about their U.S.- denominated investments.
“Emerging market central banks are selling their local currencies and buying U.S. dollars to prevent appreciation of their currencies,” Englander said. “They’re avoiding having a bigger concentration of U.S. dollars in their portfolio by turning around and selling dollars against the euro and other currencies.”
Canada’s Finance Minister Jim Flaherty said this week that China, may be poised to buy Canadian dollars as it seeks to shield its $2.3 trillion worth of reserves against the U.S. dollar’s decline. Russia’s central bank said last month it will add Canadian dollars to its reserves and may include more currencies to reduce its dependence on the U.S. dollar.
Declines in the greenback mostly stalled this month as traders bet on a 48 percent chance that Fed Chairman Ben S. Bernanke will increase the target rate for overnight lending between banks by June. Policy makers will end most emergency lending programs and debt purchases by March because of “improvements in the functioning of financial markets” and stabilizing labor markets, the Federal Open Market Committee said on Dec. 16.
Reports this month showed the U.S.’s jobless rate unexpectedly fell, retail sales beat forecasts and purchases of existing homes rose to the highest level in almost three years in November. Benchmark rates are as low as zero percent in the U.S. compared with 8.75 percent in Brazil and 3.75 percent in Australia. They are 0.1 percent in Japan and 1 percent in the Euro region.
Barclays forecasts that the Federal Reserve will begin raising rates at the end of the third quarter of next year, while the European Central Bank’s tightening cycle will begin at the start of 2011. The Fed’s target rate will reach 2 percent by the end of 2011, Englander said.
Barclays on Dec. 10 forecast the euro will fall to $1.40 in six months before rallying to $1.45 by the end of 2010. The euro traded at $1.4333 today.