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

‘Way Oversold’

While the dollar is “somewhere safe to hide,” the euro is poised to rebound before Greek elections next month before resuming its decline against the U.S. currency, said John Taylor, founder of New York-based currency-hedge fund FX Concepts LLC, which oversees $3.9 billion.

“We are way oversold in the euro,” Taylor said on May 24 in an interview on Bloomberg Television’s “Inside Track” with Erik Schatzker and Sara Eisen.

The dollar’s appeal is also getting a boost as nations generally perceived as havens become less welcoming.

The Swiss National Bank introduced a 1.20 franc-per-euro limit in September after its currency rose to a record, hurting exporters and increasing the risk of deflation.

Japan spent 16.4 trillion yen ($206.6 billion) in intervention in 2010 and 2011, according to the Finance Ministry. The franc has lost 1.9 percent against the dollar this year and the yen has depreciated 3.1 percent.

“The other countries that often have some kind of a safe- haven attraction to them are slowly but surely saying that we’re not so sure we want our currencies to be stronger,” Standard Life’s Dickson said.

Bank Demand

Demand for dollars is also showing up in financial institutions needing to meet Basel III regulations set by the Bank for International Settlements. The new rules on capital reserves will “increase the price of safety” embedded in assets deemed a reliable store of value, the IMF wrote in an April 18 report.

The cost for banks to convert euro interest payments into dollars through the swaps market for three years has increased to 67.8 basis points below the euro interbank offered rate, or Euribor, from 34.8 basis points below in March 29, according to data compiled by Bloomberg. Negative spreads show a premium for dollar funding.

Dollar assets are also looking attractive on a relative basis, with yields on Treasuries due in 10 years averaging 0.37 percentage point more than German bunds of similar maturity. As recently as November, Treasuries yielded about 0.33 percentage point less than bunds.

“With the chronic problems and challenges in Europe, it’s hard to see how that’s going to overtake the dollar anytime in our lifetime, if the euro even still exists in our lifetime,” Tim Adams, a managing director at the Lindsey Group, a Fairfax, Virginia-based investment consultant and former Treasury undersecretary, said May 1 at the Bloomberg Washington Summit hosted by Bloomberg Link.

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