Dollar’s First Monthly Gain Since June Trims 2009 Loss to 4.2%

Jan. 1 -- The dollar posted its first monthly gain since June versus the currencies of major U.S. trading partners as the Federal Reserve moved closer to withdrawing stimulus measures that helped cause the greenback to fall 4.2 percent for the year.

The dollar advanced to a three-month high against the yen and rallied versus the euro after the Fed said at the conclusion of its Dec. 16 meeting that job losses are “abating.” The greenback pared its annual decrease against the Australian dollar and Norwegian krone as a surge in Treasury yields made the U.S. 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 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 percent in December to 77.860 yesterday. It was the first monthly advance in six months and the biggest gain since January 2009.

The index finished the decade down 24 percent as U.S. 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.

Foreign Reserves

The U.S. currency’s share of foreign reserves held by global central banks dropped to 61.6 percent during the quarter ended Sept. 30, the lowest on record, from 71 percent a decade ago, the International Monetary Fund reported on Dec. 30. The euro’s share rose to 27.7 percent, from 17.9 percent.

“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 percent to $1.4321 per euro on Dec. 31, from $1.5005 at the end of November, paring its loss in 2009 to 2.5 percent. The U.S. currency advanced 7.7 percent to 93.02 yen, from 86.41, and gained 2.6 percent for the year. It touched 93.15 yesterday, the highest level since Sept. 7. The euro increased 2.7 percent to 133.20 yen in December and advanced 5.1 percent in 2009.

Barclays’s View

Barclays Plc, the world’s third-largest currency trader, raised its three-month forecast for the dollar against the euro on Dec. 10 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 June 30. 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 yesterday to the highest level in more than two years, making U.S. 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 greenback in 2009 among major currencies, rising at least 20 percent as signs of global recovery spurred investors to sell dollars and buy higher-yielding assets.

2009 Returns

Buying the five currencies with funds borrowed in the dollar and yen would have returned 34 percent in 2009, according to Bloomberg data. The same trade would have lost 26 percent in 2008.

The Aussie and krone fell in December against the dollar after the U.S. Labor Department reported the fewest monthly job losses since before the recession, fueling 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 percent on Dec. 16 while saying “economic activity has continued to pick up.”

Futures trading in Chicago showed yesterday a 62 percent chance that the Fed will raise its target lending rate by at least a quarter-percentage point by its June meeting, up from 31 percent odds a week ago.

U.S. employers eliminated 1,000 jobs in December after cutting 11,000 in the previous month, according to the median forecast of 58 economists in a Bloomberg News survey. The report from the Labor Department is due on Jan. 8.

“The surge in growth can continue for a while,” said David Tien, senior quantitative researcher at Fischer Francis Trees & Watts in New York, which has $27 billion in assets. “The key question is against which currency the dollar’s gain can be the most pronounced. We think it’s the yen.”