Pimco Says Dollar to Weaken as Reserve Status Erodes

By Garfield Reynolds and Wes Goodman
August 19, 2009 (Bloomberg)

Pacific Investment Management Co., the world’s biggest manager of bond funds, said the dollar will weaken as the U.S. pumps “massive” amounts of money into the economy.

The dollar will drop the most against emerging-market counterparts, Curtis A. Mewbourne, a Pimco portfolio manager, wrote in a report on the company’s Web site. The greenback is losing its status as the world’s reserve currency, he said.

“Investors should consider whether it makes sense to take advantage of any periods of U.S. dollar strength to diversify their currency exposure,” Mewbourne wrote in his August Emerging Markets Watch report. “The massive amounts of U.S. dollar liquidity produced in response to the crisis” have helped reduce demand for the currency, he wrote.

The Dollar Index, which tracks the greenback against a basket of currencies, touched 78.823 today, the lowest this week. It has fallen 12 percent from this year’s high in March as U.S. authorities pledged $12.8 trillion to combat the recession. China, the world’s largest holder of foreign-currency reserves, and Russia have both called for a new global currency to replace the dollar as the dominant place to store reserves.

“While we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the U.S. dollar as a store of value even in the absence of a single viable alternative,” Mewbourne wrote.

Percentage of Reserves

The dollar as a percentage of global central banks’ foreign reserves increased to 65 percent in the first three months of the year, from 64.1 percent in the previous quarter, according to the International Monetary Fund. Its share has remained around 65 percent the last five years, after falling from 72.7 percent in 2001.

The U.S. government boosted spending and the Federal Reserve bought bonds to revive credit markets that seized up after financial companies posted $1.6 trillion in writedowns and losses, raising concern there is an oversupply of greenbacks.

The currency rose 0.1 percent to $1.4118 per euro as of 9:06 a.m. in New York. The Dollar Index is down about 2.8 percent this year, after a 6 percent gain in 2008.

Asian currencies stand to benefit as the region’s economy grows and the dollar’s allure fades, said Rajeev de Mello, Singapore-based head of Asian investments at Western Asset Management Co., which oversees $473.4 billion.

Sample Coin

“We are positive on the Asian currencies against the dollar and think they will continue to rally,” de Mello said in an interview. “I do think the diversification of reserves is something that’s important and I think we’ll see some from China into other currencies and this will benefit as well Asian currencies and other emerging currencies.”

China’s central bank renewed its call for a new global currency in June and said the International Monetary Fund should manage more of members’ foreign-exchange reserves. Russian President Dmitry Medvedev last month illustrated his call for a supranational currency by producing a sample coin after a summit of the Group of Eight nations.

Mewbourne joins investor Jim Rogers, who said last year that he was shifting all his assets out of dollars and buying Chinese yuan because the Fed eroded the value of the U.S. currency. The dollar is losing its status as the world’s reserve currency, said Rogers, who is the author of books on investing including “Hot Commodities.”

Sovereign Funds

Bill Gross, who runs the $169 billion Pimco Total Return Fund, is also warning the U.S. currency will fall.

Holders of dollars should diversify before central banks and sovereign wealth funds do the same because of concern government budget deficits will deepen, Gross said in June.

Gross’ fund has returned 12 percent in the past year, outperforming 96 percent of its peers, according to data compiled by Bloomberg.

Billionaire Warren Buffett wrote in a New York Times commentary today that the dollar is under threat from the “monetary medicine” that has been pumped into the financial system.

“Enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects,” Buffett, 78, wrote. The “greenback emissions” will swell the deficit to 13 percent of gross domestic product this fiscal year, while net debt will increase to 56 percent of GDP, he said.

Budget Deficit

The U.S. budget deficit reached a record $1.27 trillion for the first 10 months of the fiscal year and broke a monthly high for July, the government said Aug. 12.

There is no viable immediate alternative to the U.S. dollar for now as the euro region lacks a political union while Japan’s economic weakness makes it impossible to consider the yen for such a role, Pimco’s Mewbourne wrote. The currencies of emerging states such as China can’t play a reserve role as long as they are subject to capital controls, which restrict international traders to using non-deliverable forwards, he wrote.

Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE.

To contact the reporters on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

To contact the editors responsible for this story: Rocky Swift at rswift5@bloomberg.net; David Liedtka at dliedtka@bloomberg.net