Show actual returns exceed dollar still printing money with Bernanke

The U.S. bond market dollar bulls are giving cause for optimism after driving the dollar higher against the 16 other major currencies since the first week of November.

Adjusted for inflation, or real benchmark yields 10-year Treasuries are higher than for similar notes maturing in Germany, the UK and Japan. That may help the U.S. attract foreign capital to finance the budget deficit a billion dollars, even as Federal Reserve chairman, Ben S. Bernanke flooded the global financial system with cash to purchase 600 billion U.S. dollars of debt.

"The history of performance is important for the dollar," said Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, which predicts an increase of 9.3 percent against the euro next year an advance of 9.6 percent against the yen. "If we continue to see an improvement in the economic data that will drive superior performance in the U.S.."

IntercontinentalExchange Inc. 's U.S. dollar index, which measures its performance against six trading partners, rose by 2.8 percent since Nov. 12, when the Fed started buying Treasuries in its second round of so-called quantitative easing. The actual performance of U.S. 10 years was 2.15 percent at the end of last week after an average of 1.74 percent over the last decade.

More Negotiated

The dollar was 3.4 percent stronger against the euro in the period to $ 1.3226, up 1.7 percent against the yen at 83.95 and up 1.9 percent against the pound, trading at $ 1.5802. The dollar is the most traded currency in the world, followed by the euro, yen and sterling, according to the Bank for International Settlements in Basel, Switzerland.

A survey by Ried Thunberg ICAP Inc., 20 money managers found that $ 1340000000000 control all expectations that the dollar will be stronger or little changed against the euro over the next three months and 90 percent of project the same against the yen. The survey of Jersey City, New Jersey, Reid Thunberg, a unit of ICAP Plc, on 13 December.

U.S. 10-year real yields are more than a percentage point more than the Japanese equivalent, approaching the most since October 2009. Japanese production ended last week in a 1 percent below this year's high of 3.07 percent on Jan. 8. Euro real yield reached 2.49 percent on January 4, before falling to 1.05 percent last week. This is 0.32 percent in the United Kingdom

Performance Help

Increased yields may help the dollar against the yen, according to Ronald Leven, executive director and strategist at Morgan Stanley in New York.

It tends to rise against the yen since the U.S. yields increase relative to Japanese rates. The correlation coefficient between the dollar-yen and the differential between the U.S. and Japan two years yields an average of 0.52 since 2005. A correlation of one means the movement even in lock step, while a mean less moving in opposite directions.

Even after recovering nearly 6 percent from a minimum of 11 months on 4 November, the dollar remains undervalued against 10 of the 16 most traded currencies, according to a measure of purchasing power parity by the Organisation for Cooperation and Development in Paris, which measures the relative prices of goods between countries.

The dollar is 27 percent below fair value against the yen, 36 percent undervalued against the Swiss franc, 33 percent against the Norwegian kroner, 31 per cent against the Danish krone and 30 percent against the Australian dollar, as shown.

"Best Value"

"Our fair value estimates suggest that the U.S. dollar the best value among the G-3," said Leven of Morgan Stanley, referring to the economies of the U.S., euro area and Japan .

real returns have had little effect on the rate of the euro this year. U.S. real yields were mostly below the European equivalent rates when the dollar rose to a four-year high against the single currency in the region in June.

The average forecast of at least 36 analyst estimates compiled by us is for the dollar to trade at $ 1.35 per euro in late September 2011. The U.S. currency will rise to 90 yen by the end of next year, according to the data.

Changes in the dollar against the euro over the past two years have been more influenced by movements in stock prices, "the data show a correlation. The decline in the Standard & Poor's 500 represented almost 50 percent of the dollar's gains against the currency of 16 nations in 120 days to 10 December, according to the data.

Libor comparisons

the shorter-term rates are working against U.S. The dollar three-month interbank offer rate in London was 0.3 percent last week, compared with 0,957 percent rate in euros, 0.745 percent for Libor in sterling and 0,183 by percent in yen Libor.

The rise in U.S. yields have tended to coincide with a weaker dollar since the 2008 collapse of Lehman Brothers Holdings Inc., which boosted demand for the greenback as a haven. An increase in Treasury yields to 10 years was more strongly correlated with the fall of the dollar in September than in any other time since 1998.

"Some of the tools we use in the community of foreign exchange, such as interest rate spreads, have become meaningless concepts," said David, global head of currency strategy at HSBC Holdings Plc in London. "The risk-in, the risk of closure has led to everything."

Momentum

That relationship could end U.S. up the pace of economic recovery, according to Ian Stannard, senior currency strategist in London at BNP Paribas SA, France's largest bank. The dollar index rose 0.9 percent last week to 80.07, while U.S. yields a 10-year note rose 31 basis points to 3.32 percent, the biggest jump since the period ending August 7, 2009. Yields were 3.34 percent today.

The dollar index rose 0.2 percent today to 80.255, winning for the sixth consecutive day, the longest stretch of increases since June.

"The point of view of risk, the risk of closure has to change as economic divergence takes place, with the U.S. economy up," he said. "As we see excess return on U.S. assets, the dollars that are generated will stay home."

U.S. Gross domestic product expanded 2.6 percent in 2011, more than the 1.4 percent forecast for the euro area and the forecast of 1.4 percent for Japan, according to the median estimate of 15 economists at least surveys. The UK will grow by 1.9 percent, another poll.

The agreement last week between President Barack Obama and Senate to extend the Bush tax cuts can increase revenues up to half a percentage point to GDP next year, according to Michael Feroli, chief U.S. economist New York, JPMorgan Chase & Co.

'Far From Over'

"The situation in Europe remains a concern, and the future is more uncertain than ever," said the International Monetary Fund Dominique Strauss-Kahn in Geneva the day the deal was announced. The effects of global financial turbulence "are far from over," he said.

U.S. Higher yields will push the dollar over time that reflect the economic growth and not a concern for the U.S. budget deficit, according to Geoffrey Yu, currency strategist in London at UBS AG, the second world's largest currency trader.

"For the dollar, favorable growth differentials and problems in other parts will be useful," he said. "The euro zone faces austerity next year, while Japan's economy is likely to remain stagnant. The dollar will be the year of superior performance in the next G-3."