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Dollar Bears’ Mea Culpa Makes Bernanke No Liability

Bo Nielsen and Ye Xie / Bloomberg | September 2, 2008

Federal Reserve Chairman Ben S. Bernanke has gone from a dollar liability to an asset, sparking a rally that even bears say shows few signs of ending.

While the U.S. Dollar Index fell to a record low in March as the Fed cut interest rates at the fastest pace in two decades, traders now anticipate lower borrowing costs will help America recover from a global economic slowdown before Asia or Europe. Investors bought four times as many dollars in August as the average over the previous 12 months, according to Bank of New York Mellon, a custodian for more than $23 trillion in assets.

Traders who a month ago doubted there was anything Bernanke could do to keep the greenback from depreciating in the face of a widening budget deficit, mounting credit market losses and falling consumer confidence are embracing the currency. The 6.4 percent gain against the euro in August was the best monthly advance since Europe’s common currency was introduced in 1999. Futures traders are making the biggest bets on the dollar versus six major trading partners since 2005.

“The dollar is cheap,” said Roddy MacPherson, an Edinburgh-based fund manager at Scottish Widows Investment Partnership Ltd., which manages about $165 billion. “The U.S. has been quite preemptive in bringing rates down and that bodes better for the U.S. relative to many other countries.”

MacPherson set up trades to profit from the U.S. currency’s appreciation against the Group of 10 countries, which include the U.K., Japan and Australia, after it hit a record-low of $1.6038 to the euro on July 15.

Full article here