Dollar to Weaken 10% to $1.50 per Euro as Central Banks Sell, Faros Says

The dollar will fall 10 percent by December against the euro, extending its biggest quarterly loss since 2002, as Asian and South American central banks sell greenbacks for Europe’s common currency, said Faros Trading LLC.

Faros, which executes currency transactions on behalf of hedge funds and institutional clients, estimates policy makers in the two regions purchase about $12 billion a day to curb the strength of their currencies and support exporters. Unwilling to hold on to dollars, the central banks then sell those greenbacks for currencies including euro, yen and sterling, it said. Faros correctly predicted in July that the euro would rise 6 percent to $1.3684 over two months.

“The real weakening of the dollar is coming from Asian central banks who are essentially selling the dollar every single day as they get out of the dollars that they’re buying through intervention in Asia,” said Douglas Borthwick, Stamford, Connecticut-based head of trading at Faros. “We see continued dollar weakness going forward and expect the euro to strengthen a further 10 percent through the end of the year.”

The dollar traded at $1.3656 per euro as of 6:44 a.m. in Tokyo, falling for a third straight week. A decline of 10 percent to exceed $1.50 would see the greenback trading at its lowest level since December 2009.

The U.S. currency climbed as high as $1.1877 per euro on June 7, the strongest since March 2006, as concerns over budget deficits in nations including Greece, Portugal and Spain prompted speculation among investors that the European Union’s currency was in danger of collapse.

Currency Reserves

The dollar’s share of global foreign-exchange reserves rose in the second quarter as investors sought safe assets at the height of the European crisis. Allocations climbed to 62.1 percent in the second quarter from 61.7 percent in the previous three months, the International Monetary Fund reported yesterday. That was down from the 62.8 percent held in the same period a year ago.

The euro’s share declined to 26.5 percent from 27.2 percent in the previous quarter and an all-time high of 27.8 percent in the three months ended Sept. 30, 2009. The yen’s share rose to 3.3 percent from 3.1 percent.

The euro has climbed 15 percent since its June low after European officials unveiled in May a 750 billion euro ($1 trillion) backstop to blunt the sovereign-debt crisis and restore confidence in the common currency.

Diversification away from the dollar will begin to register in IMF reserves data amid selling by Asian and South American central banks, Borthwick said.

Quantitative Easing

Faros expects the dollar to also weaken as the Federal Reserve announces another round of so-called quantitative easing asset purchases to spur growth and support prices. The Dollar Index, which tracks the greenback against the currencies of six trading partners, has dropped 3.3 percent since Fed policy makers signaled Sept. 21 their willingness to expand monetary policy stimulus.

Policy makers said that day they were “prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

The policy-setting Federal Open Market Committee next meets Nov. 2-3 in Washington.