JP Morgan Chase & Co a month ago abandoned one piece of advice it had given clients in the days after the Sept. 11 terrorist attacks: Sell dollars.
The second-largest US bank grew less pessimistic on the US currency after seeing how well the Federal Reserve kept markets running after the disaster, said Larry Kantor, head of global foreign exchange research at JP Morgan.
The initial decision seemed justified because "the strong capital in-flows that had been supporting the dollar would slow in an environment of risk-aversion and economic weakness," Kantor said.
It "wasn't that any other area was going to outperform the US."
Suspending the sell recommendation has been a good call. The US currency's rise last month was the biggest against the euro since May and since June against the yen.
After weakening to US$0.9331 per euro Sept. 17, its worst level in six months, the dollar has rebounded 3.3 percent, to US$0.9027.
The dollar has gained 5.1 percent against the yen, to ?121.73, since reaching a seven-month low of ?115.83 on Sept. 20.
"Central banks have come in and are battling mightily to maintain the health of the financial system and capital flows, and have been very successful, making it premature to sell the dollar," said Kantor.
The Fed is expected to cut interest rates today for the 10th time this year. "I'm not betting against that," he said.
The Fed's actions helped ensure the availability of cash after the attacks, which destroyed New York's World Trade Center and threatened to disrupt financial markets.
During the week of the attacks, the Fed added a record US$81.25 billion in temporary reserves to the banking system and lent a record amount to banks through its discount window.
The Fed cut its benchmark lending rate Sept. 17 and again Oct. 2, to a 39-year low of 2.5 percent. The central banks of the UK, Europe, Switzerland, Canada and Sweden also lowered borrowing costs in the week following the attacks.
The US currency's recovery also followed emergency efforts by the government to spur growth by cutting taxes and boosting spending.
To gauge when the dollar is apt to slide again, Kantor is watching for a decline in a JP Morgan index that measures investors' appetite for risk.
The so-called Liquidity and Credit Premia Index posted its biggest loss since the Russian debt default of 1998 in the week after the terrorist attacks. Another drop would signal foreign demand for US assets is dwindling again, Kantor said.
Reports that the US economy shrank at a 0.4 percent annual rate in the third quarter and that the jobless rate surged to a five-year high in October as manufacturing slumped for a 15th month, helped snap a five-week rally in the dollar this week.
The currency also weakened against the euro for the first week since Oct. 5.
An index of dollar exchange rates in six major currencies including the euro and yen is little changed, at US$114.46, from its US$114.66 reading on Sept. 10.
What's more, the dollar's value against other currencies is "around the middle of the average range for the year," said Robert Sinche, head of global currency strategy at Citibank, which handles 9.74 percent of business in the foreign-exchange market. "Unless there's a big divergence from expectations," the dollar will probably hover at recent levels in coming weeks, he said.
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