Strong USD may prompt Fed to stop stimulus – Citigroup

The foreign-exchange market is signaling to Citigroup Inc. that it isn’t yet convinced the Federal Reserve will fulfill its pledge to keep pumping record amounts of cash into the U.S. economy through 2015.

The U.S. Dollar Index has gained 2.2 percent since the central bank said Sept. 13 it would keep interest rates at record lows through mid-2015 and print $40 billion a month to buy bonds, a policy that debases the currency. Higher-yielding currencies from the Czech koruna to Poland’s zloty that benefited from such actions in the past are weakening.

While the Fed said it will keep the stimulus going even after data show the economy is improving, the foreign exchange market indicates that gains in U.S. employment, housing and consumer confidence may prompt changes in policy sooner. The dollar will rally next year versus the euro and yen, based on the median estimate of more than 50 strategists from Barclays Plc to Nomura Holdings Inc. surveyed by Bloomberg.

“Does the market really believe that the 2015 Fed is going to be constrained by the 2012 Fed?” Steven Englander, Citigroup’s New York-based global head of G-10 strategy, said in a telephone interview from New York. “The answer is ‘no.’”
Dollar Strength

Citigroup sees the dollar strengthening to $1.22 per euro by the end of next year, from $1.2781 yesterday, and holding steady at about 79 yen, from 81.17. The median estimate of strategists surveyed by Bloomberg is for gains to $1.25 per euro and 83 yen.

The third-largest U.S. bank by assets anticipates appreciation in the dollar even as Englander said the Fed is likely to add to its current quantitative-easing measures, or QE3, next year by purchasing Treasuries in addition to mortgage bonds. That would reassure investors and spark a rally in the Australian and Canadian dollars, he said.

The strengthening U.S. economy is overcoming concern about the Fed swelling the supply of dollars after already injecting $2.3 trillion into the economy by purchasing bonds. In its World Economic Outlook published Oct. 9, the International Monetary Fund said gross domestic product in the U.S. will expand 2.1 percent next year, compared with an average of 1.5 percent for all advanced economies.

“Mid-year, the market might start pricing in an earlier exit by the Fed because the private sector is actually rebounding,” Christine Hurtsellers, chief investment officer for fixed-income in Atlanta at ING Investment Management, which oversees $170 billion, said Nov. 13 at a conference in New York.

Via – Bloomberg

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