U.S. Recovery Will Come at Dollar’s Expense, McCormick Says
By Thomas R. Keene and Michael J. Moore
Dec. 18 (Bloomberg) — The dollar may continue to weaken even if the U.S. economy recovers early next year, Citigroup Inc.’s Jim McCormick said.
McCormick, London-based global head of foreign exchange and local-markets strategy, said in an interview on Bloomberg Radio that the Federal Reserve’s efforts to revive the economy have been the most aggressive of any central bank, while the currency traders have rewarded central bank caution.
“The market is starting to recognize the currency implications of the fiscal and monetary policy thrusts that you’re seeing in the U.S.,” McCormick said. “Policy in the U.S. should mean that the U.S. gets out of this thing a bit more quickly, but I think it’s going to happen at the expense of the currency. If you look at the Japanese yen as a template of how currencies perform during periods of significant monetary and fiscal stimulus, it’s not a very good story for the U.S. dollar.”
The dollar all but erased its annual gain against the euro today on bets the Fed’s near-zero interest-rate policy will reduce the appeal of U.S. assets. The dollar has fallen 12 percent against the euro in the past two weeks.
Nine rate cuts in the past 14 months and $1.4 trillion in emergency lending have failed to reverse the longest recession in a quarter-century. The central bank Dec. 16 reiterated plans to buy agency debt and mortgage-backed securities and said it will study buying Treasuries.
The federal budget deficit widened last month to $164.4 billion compared with a gap of $98.2 billion in November a year earlier, the Treasury Department reported last week.
Risk Taking
How investors view currencies may change in the aftermath of the greatest financial crisis since the Great Depression, McCormick said. From 2002 through 2007, carry trades, where investors get funds in a country like Japan with low borrowing costs and buy higher-yielding assets, returned more than 10 percent annually, according to Bloomberg data.
Many of those trades have been unwound this year as $1 trillion in losses and writedowns from the credit crisis reduced investors’ willingness to buy risky assets. The Japanese yen has been the biggest gainer this year, climbing at least 15 percent against all major currencies.
“The biggest change is that you’re going to see a lot less cross-border risk taking and a lot less cross-border lending,” McCormick said. “‘That’s simply a derivative of a world that’s deleveraging, and if that’s the case, we’re going to go back to some of the old rules of foreign exchange. Things like trade balances are going to matter a whole lot more, and that’s not something we talked about in the last six to seven years.”
To contact the reporter on this story: Michael J. Moore in New York atmmoore55@bloomberg.net; Thomas R. Keene in New York attkeene@bloomberg.net
Last Updated: December 18, 2008 11:12 EST