Dollar Comeback Produces Best Asset Returns for First Time Since November

Wednesday, 01 Jun 2011 12:34 AM

 

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The dollar beat stocks, commodities and bonds in its first monthly gain since November, as the euro-region debt crisis deepened and evidence mounted that the global economic recovery is losing momentum.

The U.S. Dollar Index, which tracks the greenback versus the currencies of six major trading partners, rose 2.2 percent in May. The MSCI World (MXWO) Index of equities fell 2.45 percent last month, while the Standard & Poor’s GSCI Total Return Index of 24 commodities tumbled 6.89 percent and bonds of all types returned 1.1 percent on average, according to Bank of America Merrill Lynch’s Global Broad Market Index.

Traders fled the euro in favor of the dollar on concern Greece may still default on its debt and as the Federal Reserve prepares to stop printing cash to buy Treasurys in a policy known as quantitative easing. At the same time, economists are cutting their growth forecasts, boosting demand for the relative safety of fixed-income assets while diminishing the attractiveness of stocks and commodities.

“The main thing that’s been helping the dollar has been the debt problems in the euro-zone,” said Peter Rosenstreich, chief currency analyst at Swissquote Bank SA in Geneva, Switzerland’s largest online currency broker. “We’re still bearish on the dollar. The Fed isn’t going to be hiking until at least mid-2012.”

Dollar Rebound

The greenback’s appreciation in May followed five consecutive monthly declines totaling 11.1 percent as measured by IntercontinentalExchange Inc.’s U.S. Dollar Index. The gauge ended last month at 74.537, up from 72.933 on April 29.

Among the 16 most-widely traded currencies, South Africa’s rand fell the most, losing 3.43 percent, followed by a 2.78 percent drop in the euro and 2.73 percent decline in the Danish krone. New Zealand’s dollar was one of two currencies to rise, gaining 1.73 percent, followed by the Swiss franc’s 1.32 percent jump, according to data compiled by Bloomberg.

The euro weakened against every major currency except the rand. European Union leaders will decide on additional aid for Greece by the end of June and have ruled out a “total restructuring” of the nation’s debt, Jean-Claude Juncker, head of the group of euro-area finance ministers, said May 30.

Greece Review

Inspectors from the EU, the International Monetary Fund and the European Central Bank are set to wrap up a review of Greece’s progress in meeting the terms of last year’s 110 billion-euro ($158 billion) bailout in the next few days. The EU will then formulate its plan for further aid to Greece, which remains shut out of financial markets a year after the rescue.

Greek two-year yields reached 27.19 percent on May 24, while 10-year yields climbed to a record 17.10 percent he same day. Portuguese 10-year yields rose to 9.85 percent, the most since before the euro was created in 1999. Equivalent-maturity Irish yields touched a record 11.19 percent on May 27.

Gains in the dollar and franc, traditional havens in times of economic and geopolitical crises, reflect growing concern that global growth is decelerating just as the Fed ends its second round of quantitative easing, or QE2, totaling $600 billion this month.

“As we come to the end of QE2, the market has anticipated that possibly U.S. yields will move higher, attracting support back to the dollar,” said Adrian Foster, head of financial- market research for Asia at Rabobank Groep NV in Hong Kong.

‘Below-Trend’ Growth

Growth in global gross domestic product will slow to a ‘below-trend’ 2.6 percent pace this quarter from 3.1 percent in the first three, according to a May 27 report by New York-based JPMorgan Chase & Co.

“Developed world consumption spending is estimated to have increased at a meager 0.8 percent pace last quarter, an outcome that is nearly 1 percentage point below what we had expected just one month ago,” JPMorgan analysts led by chief economist Bruce Kasman wrote in the report.

Last month’s rally in the global bond market followed a 0.93 percent increase in April, according to Bank of America Merrill Lynch’s Global Broad Market Index.

Sovereign bonds returned 1.1 percent, including reinvested interest, led by a 1.46 percent gain in U.S. Treasurys as speculation grew that the Fed will keep it interest rates at a record low through year-end.

Corporate bonds gained 1.18 percent, while high-yield, high-risk company debt lagged behind, returning 0.46 percent.

Stocks, Commodities

The MSCI All-Country World Index of shares in 45 nations fell to 347.90 on May 31, trimming this year’s gain to 5.22 percent, led by declines in energy and materials stocks. Shares worldwide lost about $1.8 trillion in value during the month, data compiled by Bloomberg show.

The S&P 500 Index (SPX) slid 1.35 percent in May, the Stoxx Europe 600 Index dropped 0.96 percent and the MSCI Asia Pacific Index declined 2.28 percent.

The S&P GSCI Total Return Index of 24 commodities snapped the longest winning streak since 2008, posting the worst monthly performance in a year. In April, the gauge reached the highest level since October 2008.

“The underlying fundamentals remain extremely positive across the broad range of commodities,” said Paul Horsnell, head of commodities research in London at Barclays Capital, whose team of analysts correctly called the bottom in oil and copper in 2009. “Ups and downs, obviously, but in terms of an overall story, it’s a long cycle. Those kinds of cycles don’t finish in three weeks.”

Silver, Oil

Silver, the worst performer, slumped about 21 percent, posting its biggest monthly loss since October 2008, followed by about a 14 percent drop in nickel and about a 12 percent decline in cotton and sugar. CME Group Inc., the Comex owner, raised margin costs to curb price volatility after the metal climbed to a 31-year high on April 25, more than doubling in the past 12 months.

Crude oil, which represents more than half the GSCI Index, dropped 9.9 percent in New York trading and 7.3 percent in London. West Texas Intermediate is still up 12 percent this year, and Brent, the European benchmark, has increased 23 percent as unrest in the Middle East and North Africa toppled leaders in Tunisia and Egypt and spread to Libya, Iran and Syria.

Gasoline lost 9.1 percent after reaching $3.4648 a gallon on April 29, the highest level since July 2008, as refinery outages tightened supplies. The fuel is up 28 percent this year, the biggest increase in the GSCI.

Natural gas futures dropped 0.7 percent in May on the New York Mercantile Exchange, the first decline since February. Gas ended the month at $4.666 per million British thermal units, up 5.9 percent in 2011.

© Copyright 2014 Bloomberg News. All rights reserved.

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