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Dollar Cheap in Purchasing Power as Investors See Shelter
Monday, 29 August 2011

The dollar is poised for its biggest monthly gain since May, reclaiming its status as a haven while Switzerland and Japan boost efforts to weaken their currencies.

The greenback has appreciated 1.2 percent in August against a basket of the developed world’s nine most-traded exchange rates, according to data compiled by Bloomberg. That compares with a decline of 14 percent in the world’s reserve currency from this time last year through July.



Demand for U.S. assets is rising even though the Federal Reserve has pledged to keep its benchmark interest rate near zero through mid-2013 and Standard & Poor’s cut the nation’s credit rating from AAA. The two other currencies considered havens in times of financial and political strife -- the Swiss franc and yen -- are under siege by their governments and central banks after strengthening to records.

“The dollar is a buy through the end of the third quarter,” Nick Bennenbroek, head of currency strategy in New York at Wells Fargo & Co., the third-most accurate forecaster in the last six quarters as measured by Bloomberg, said in an Aug. 23 telephone interview. “The yen and the Swiss franc are very expensive and the dollar is very cheap and it’s the only major central bank that is not standing in the way of a currency advance.”

The dollar was little changed at 76.66 yen at 7:38 a.m. in New York after strengthening 0.1 percent to 76.64 last week. It gained 1.2 percent versus the franc to 81.58 centimes after rallying 2.7 percent last week. The Bloomberg Correlation- Weighted Currency Index for the dollar dropped 0.1 percent to 89.3884, up from 88.3486 at the end of July.

Purchasing Power Parity

Even with the gains, America’s currency is 47 percent too weak against the franc and 31 percent undervalued compared with the yen, based on an index developed by the Organization for Economic Cooperation and Development in Paris that measures currencies using prices for similar goods and services in two countries.

The dollar may continue to appreciate as the Swiss National Bank and Bank of Japan intervene to stem gains and currencies of commodity-producing nations such as Australia, New Zealand and Canada lose some of their luster amid a global economic slowdown.

 


  

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