Dollar Bottom Detected in Biggest Flows Since 2009: Currencies

New York (Nov 5)  The dollar, after falling to its lowest levels since February against major peers, is attracting the biggest wagers by money managers in almost five years on signs the U.S. economy is gathering pace.

Pension funds and institutions bought the most dollar-denominated assets in late October since at least January 2009, according to Bank of America Corp. data that don’t cite actual volumes, as the Bloomberg U.S. Dollar Index fell more than 5 percent from its high for the year in July. The purchases were mainly against the pound and euro.

Growth in the U.S. will accelerate in every quarter of 2014, starting at 2.6 percent and building to 3 percent, while in the Group of 10 overall it’s forecast to be about 2 percent for most of the year, Bloomberg surveys of economists show. A stronger economy may keep U.S. inflation levels higher than in other major nations, allowing the Federal Reserve to lead the world in reducing monetary stimulus that has weighed on the greenback, according to Bank of America and Societe Generale SA.

“The fundamentals story, as far as the dollar’s concerned, remains very strong,” David Woo, the global head of rates and currencies at Bank of America in New York, said in a Nov. 1 phone interview. “The biggest story in financial markets in 2014 will be about inflation, particularly about inflation divergence,” and “there’s no question that” the U.S. is “going to be the first one to tighten policy,” he said.

Fed Delay

Since falling to 997.94 on Oct. 23, the Bloomberg Dollar Index has jumped 1.5 percent to 1,013.28 at 10:05 a.m. in London. The gauge, which measures the greenback against the euro, yen, pound and seven other currencies, has ranged this year from as low as 984.07 in January to 1,056.33 in July.

While the Fed decided last week to wait for the economy to improve further before cutting its $85 billion of monthly bond purchases, Bank of America says it’s watching inflation for signs of when growth may overhaul peers. Deutsche Bank AG, the biggest currency trader, says tapering may start next month.

The widest gap between annual consumer-price inflation in the U.S. and the 17-nation euro region this year is prompting investors to demand higher yields to own Treasuries rather than German bunds, boosting the appeal of the dollar. Inflation eats into the fixed-rate coupons paid by bonds.

Two-year U.S. government notes yield 0.3 percent, 17 basis points, or 0.17 percentage point, more than German securities, data compiled by Bloomberg show.

Slowing Inflation

Annual consumer-price inflation in the U.S. slowed to 1.2 percent in September, in line with the estimate of 44 analysts surveyed by Bloomberg and down from 1.5 percent the previous month, the Labor Department in Washington said Oct. 30. The following day, the European Union’s statistics office estimated the pace of euro-area price gains eased to an almost four-year low of 0.7 percent in October, from 1.1 percent the prior month.

Inflation is a useful measure of how well an economy is recovering, said Sebastien Galy, a senior foreign-exchange strategist at SocGen in New York.

“It’s like you’re aquaplaning with your car,” Galy said. “Until you reach the friction point, the car isn’t heating up. That’s what’s happening in the EU and U.S.”