Top Currency Forecasters Say Best Over for Dollar as Fed Embraces Easing

The most accurate foreign-exchange forecasters say the dollar’s best quarterly rally since 2008 has no chance of continuing to year-end as a slow economy spurs the Federal Reserve to flood the world with more U.S. currency.

Led by JPMorgan Chase & Co., the five best strategists as measured by Bloomberg News in the six quarters through September see the currency averaging $1.34 per euro in the final three months of 2011, from $1.3387 on Sept. 30. They estimate it will average 76.6 yen, from 77.06.

Reports on everything from jobs to housing and incomes show the world’s largest economy may be in jeopardy of slipping back into recession, forcing the Fed to print more money for the third time in three years to inject into the financial system through bond purchases. Forecasters say the strategy would debase the dollar, which is down 22 percent since March 2009 even with last quarter’s gains.

“The Fed could start discussing the expansion of its balance sheet by the end of this year and begin with the asset purchases in early 2012,” John Normand, the London-based global head of foreign-exchange strategy at JPMorgan, said in an interview on Oct. 5. “The bias will be for a modest retracement in the dollar from current levels. Investors are already extraordinarily long of dollars.”
Global Turmoil

Normand, the top forecaster with a 4.37 percent margin of error, sees the 17-nation euro at $1.38 by year-end. The firm’s yen prediction is 75 per dollar.

The U.S. currency fell 0.1 percent to $1.3661 per euro and was little changed at 76.69 yen at 2:40 p.m. New York time.

Turmoil in global financial markets last quarter as Europe’s sovereign-debt crisis deepened and Standard & Poor’s stripped the U.S. of its top AAA credit rating led investors to shun all but the safest assets, such as Treasuries. That helped spark a 7.14 percent gain in the dollar against a basket of nine developed-nation peers as measured by Bloomberg Correlation- Weighted indexes. That beat bonds, stocks and commodities.

While almost three years of near-zero interest rates from the Fed and $2.35 trillion of bond purchases helped pull the economy out of a recession, concern is rising that gross domestic product may soon start to shrink.

Bloomberg

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