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Dec. 11 (Bloomberg) -- The dollar is becoming too expensive for investors in Asia to use as a source for funding carry trades in the region, a development that may help extend the currency’s best annual gain since 2008 into next year.
BlackRock Inc. and Amundi Asset Management, which oversee more than $5 trillion, are considering currencies other than the dollar to fund trades in Asia that rely on borrowing cheaply in one exchange rate to buy those of nations with higher interest rates. Carry trades that sell dollars to purchase a basket of currencies containing Indonesia’s rupiah and the Thai baht made 0.7 percent this quarter, below the 2 percent for deals funded by euros and yen.
“It matters what sort of funding currency you pick,” Joel Kim, the head of Asia-Pacific fixed income at BlackRock, said this month in Singapore. “It’s going to be more challenging for Asian currencies to do very strongly against the dollar.”
America’s currency is denting returns for carry traders with the Bloomberg Dollar Index poised to close the year above the 1,000 level for the first time since 2008. The gains have been fueled by speculation that the Federal Reserve may soon trim its record stimulus measures.
A centerpiece of the policy has been the printing of dollars that the Fed then injected into the financial system through the purchase of $85 billion of bonds each month.
Forecasters surveyed by Bloomberg see the U.S. currency advancing against every Group-of-10 peer in 2014. That makes it less suitable for carry trades, a strategy that has lost investors the most money this year since 2008, according to data compiled by Bloomberg.
The Bloomberg Dollar Index was at 1,012.88 in New York yesterday, up from its low this year on a closing basis of 984.07 in January. The last time it finished a year above 1,000 was in 2008, when it rose 8.9 percent to 1,043.
While U.S. policy makers weigh cutting stimulus, their counterparts in Japan and the euro region have signaled they may loosen monetary policy further. That boosts their currencies’ appeal as carry-trade funders, said BlackRock’s Kim.
His top Asian picks for 2014 are South Korea’s won and Chinese yuan, which he predicts will be buoyed by reforms being undertaken by the world’s second-largest economy.
Amundi, which manages 759 billion euros ($1 trillion), favors buying the won and rupee, which will benefit from the rise of India’s pro-business Bharatiya Janata Party, said James Kwok, the firm’s London-based head of currency management.
For funding the trades, Kwok said he’s considering switching to the Canadian dollar because of the North American nation’s relatively low 1 percent benchmark interest rate. The loonie fell 6.6 percent versus its U.S. counterpart this year.
“A shift to another low-yielding funding currency like the Canadian dollar will be good for emerging-market portfolios,” Kwok said in an interview via e-mail on Dec. 4. “The U.S. economy will continue to outperform the rest of the world, and therefore the dollar will strengthen.”
U.S. gross domestic product will grow 2.6 percent in 2014 and 3 percent in 2015, compared with 1.9 percent and 2.2 percent for the G-10, economists surveyed by Bloomberg say.
Any Fed tapering will soon be reflected in exchange rates and the dollar will once again become a “solid” carry-trade funder, according to Sacha Tihanyi, a currency strategist at Scotiabank in Hong Kong. Fed Chairman Ben S. Bernanke said last month the central bank will probably hold down its target rate long after it ends bond purchases.
“The U.S. dollar should gain into the taper, but I suspect Fed rhetoric will seek to suppress that to some degree and reiterate the low-rate environment,” Tihanyi said in a Dec. 3 interview. “This could cap U.S. dollar strength.”
Choosing the right funding currency has become all the more important given the carry trade’s losses in 2013.
Deutsche Bank AG’s G-10 FX Carry Basket gauge has fallen 4 percent this year, the most since 2008. While the gauge has recovered some of the losses it suffered from April through August, it’s still down 25 percent from its peak on the eve of the global crisis in July 2007. A mid-year spike in volatility made it more difficult for the strategy to make money.
The dollar had been a profitable way of funding carry trades because Fed stimulus combined with the zero-to-0.25 percent target interest rate since December 2008 made it cheap to borrow in the currency.
Carry trades funded by dollars and buying the basket of Asian currencies outperformed those using the euro and yen in the third quarter, declining 1.5 percent compared with a plunge of 4.1 percent, data compiled by Bloomberg show. The basket comprises the rupiah, baht, Indian rupee, won and yuan.
The Bloomberg U.S. Dollar Index, which measures the greenback against the euro, yen, pound and seven other currencies, has risen 2.7 percent this year, poised for its best annual performance since 2008.
The Bloomberg-JPMorgan Chase & Co. Asia Dollar Index of regional currencies has fallen 1.4 percent in 2013, paced by the rupiah’s 20 percent drop and the rupee’s 10 percent slide.
“A basket of funding in yen, euro, Swiss franc and Canadian dollar might be sensible,” Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in New York, said in a Dec. 4 interview. “There’s a decent chance of more loosening of monetary policy. The Canadian dollar is an alternative.”
--With assistance from Ye Xie in New York. Editors: James Regan, Robert Burgess