Dollar scarce as top-quality assets fall 42% after stimulus

May 29 (Bloomberg) -- The dollar is proving scarce, even after the Federal Reserve flooded the financial system with an extra $2.3 trillion, as the amount of the highest-quality assets available worldwide shrinks.

From last year’s low on July 27, the greenback has risen against all 16 of its major peers. Intercontinental Exchange Inc.’s Dollar Index surged 12 percent, higher now than when the Fed began creating dollars to buy bonds under its extraordinary stimulus measures at the end of 2008.

International investors and financial institutions that are required to own only the highest quality assets to meet investment guidelines or new regulations are finding fewer options beyond dollar-denominated assets. The U.S. is one of only five major economies with credit-default swaps on their debt trading at less than 100 basis points, meaning they are viewed as almost risk free. A year ago, eight Group-of-10 nations fit that category, data compiled by Bloomberg show.

“The pool of high-rated assets has been shrinking, not just in the Eurozone but elsewhere as well,” Ian Stannard, Morgan Stanley’s head of Europe currency strategy, said in a May 22 telephone interview. “With the core of Europe shrinking, and the available assets for reserve purposes shrinking, it makes the euro zone less attractive.”

Euro Depreciation

The dollar is gaining mainly at the expense of the euro, which has depreciated almost 5 percent in the past six months against a basket of nine major currencies tracked by Bloomberg as nations from Spain to Italy see their credit ratings downgraded amid the region’s sovereign crisis.

Spain, which has about $917.5 billion of debt, has been cut six levels by Moody’s Investors Service to A3 from Aaa in September 2010. Italy, with more than $2 trillion of debt, has been reduced four levels to A3 from Aa2 in October.

“We’re seeing many more periods of dollar buying during these uncertain times,” Ken Dickson, an investment director of currencies at Standard Life Investments in Edinburgh, which manages $257 billion, said May 24 in a telephone interview.

The U.S. currency appreciated 2.06 percent last week to $1.2517 per euro in New York after touching $1.2496, the strongest since July 2010. It gained 0.84 percent to 79.68 yen. The Dollar Index jumped 1.37 percent to 82.402, its fourth- straight weekly rally.

The dollar rose 0.1 percent to $1.2524 per euro as of 8:49 a.m. in New York, and was also little changed against the yen at 79.55.

Bigger Share

The five economies with default swaps trading at less than 100 basis points have a combined $14 trillion in debt, with the U.S. accounting for 75 percent, according to CMA data compiled by Bloomberg as of May 25. A year ago, when there were eight nations, the total was $24 trillion, with America making up 38 percent. German credit-swaps rose to 100 basis points today from 99 basis points last week.

Bank of America Merrill Lynch’s AAA Rated Global Fixed Income Index contained 3,597 securities with the highest ratings as of April 30, down from a high of 5,331 in December 2007, the fewest since November 2005. Dollar assets make up 65 percent of the index, up from 56 percent in 2008.

Hungary’s central bank is among reserve managers diversifying foreign-exchange holdings as the credit quality of European assets declines. The central bank said it will include dollars, yen and British pounds in its reserves, currently invested exclusively in euro-denominated securities.

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