Dec. 24 (Bloomberg) -- The dollar will recover against its major counterparts as the Federal Reserve prepares to raise interest rates and European nations face credit-rating reductions, according to Brown Brothers Harriman & Co.
Standard & Poor’s cut Greece’s rating on Dec. 16 to BBB+, three steps above high-risk, high-yield status, and said the ranking may drop further. Concern about a default among the 16 sovereign nations making up the euro area helped push the common currency down from its highest this year against the greenback.
“Portugal, Italy, Greece and Spain are really coming under stress,” Win Thin, a senior currency strategist in New York at Brown Brothers, said in a Bloomberg Radio interview. “It’s one thing we think will weigh on the euro over the medium term.”
The dollar has rallied 5.4 percent since trading at $1.5144 per euro on Nov. 25, the fastest 21-day appreciation since January. The U.S. currency gained against the yen and 12 other of its 16 most actively traded counterparts since then as traders added to bets the Fed will raise rates next year.
“The dollar can turn around versus the majors and pick up some lost ground,” Thin said. “Once the Fed starts hiking, the yen resumes its role as the major carry trade currency.”
In the carry trade, investors borrow in one currency to invest at higher yields in another. The trade earns a profit based on the difference between the two rates and may lose money should the funding currency strengthen.
Fed funds futures on the Chicago Board of Trade indicate a 91 percent chance the U.S. central bank raises rates by November, up from 84 percent a month ago.