Dollar Optimism Soars to 18-Month High as U.S. Outpaces Europe

March 10 (Bloomberg) -- Investors are the most bullish on the dollar since the collapse of Lehman Brothers Holdings Inc. on speculation the U.S. economy will expand at a faster pace than in Europe and Japan, a survey of Bloomberg users showed.

The world’s reserve currency will rise over the next six months, according to respondents in the Bloomberg Professional Global Confidence Index. Sentiment toward the U.S. economy rose among the 1,612 participants in the survey, even as the outlook for global growth fell for a second consecutive month.

The dollar strengthened this month to the most since May against the euro on concern Greece’s struggles to close the biggest deficit in the European Union as a percentage of gross domestic product will weigh on the region. The Federal Reserve will raise interest rates before the European Central Bank and Bank of Japan, according to the median estimate of more than 30 economists surveyed by Bloomberg.

“Growth differentials and interest-rate differentials, and the fact that the U.S. is so far doing quite well compared with the euro-zone” have benefited the dollar, said Meg Browne, a vice president of foreign-exchange research at Brown Brothers Harriman & Co. in New York and a survey participant. Greece has been “one of the drivers of dollar strength. There are a number of reasons why longer-term, we think the dollar will strengthen,” she said.

Dollar Index

Sentiment toward the dollar climbed to 66.39 this month from 55.72 in February, according to the survey. The measure is a diffusion index, meaning a reading above 50 indicates Bloomberg users expect the dollar to strengthen.

The high for the index was the 68.86 reading in September 2008, when Lehman’s bankruptcy drove investors to the dollar as a refuge. The Bloomberg Correlation-Weighted Index for the dollar rose the next two months.

The fallout from the budget crisis in Greece has made German investors the most bearish on the 16-nation euro currency since the survey began in November 2007. Sentiment from German participants tumbled to 20 from 37.5, and dropped to 12.5 percent in France and 21.48 in Spain.

“The Greece situation was definitely something that helped the dollar recover,” said Shaun Osborne, chief currency strategist in Toronto at Toronto-Dominion Bank and a survey participant. “It started to take on a life of its own. Now the markets are waiting to see where we go from here.”

Addressing the Crisis

German Chancellor Angela Merkel and Luxembourg Prime Minister Jean-Claude Juncker called for regulation of credit- default swaps yesterday to shore up the euro area and prevent a rerun of the Greek financial crisis.

Greece’s budget gap, at 12.7 percent of GDP, is more than four times EU limits. Prime Minister George Papandreou’s government outlined measures last week to save 4.8 billion euros ($6.5 billion), including higher fuel, tobacco and sales taxes, as it seeks to lop 4 percentage points off the deficit.

The index for the U.S. economy rose to 48.48, from 41.27, while the outlook for Western Europe’s economy dropped to 41.04, the lowest since July, from 49.77. The U.S. economy will expand 3 percent in 2010, more than twice as much as in the euro zone and almost double that of Japan, according to the median forecasts in Bloomberg surveys of economists.

Rate Differentials

Speculation the U.S. economy will grow at a faster pace than those of Europe and Japan is bolstering bets that differences in interest rates may begin to boost the dollar. The Bloomberg Correlation-Weighted Index for the dollar has risen 6.1 percent to about 101.5 from last year’s low of 95.63 on Nov. 17.

“The U.S., perhaps not this year, will be one of the first to raise interest rates,” said Fabian Eliasson, head of U.S. currency sales at Mizuho Corporate Bank Ltd. in New York, and a survey participant.

The Fed is forecast to lift its target rate in the third quarter to 0.50 percent from a range of zero to 0.25 percent, according to a Bloomberg News survey of 75 economists. The European Central Bank will boost its key rate to 1.25 percent from 1 percent in the fourth quarter, while the Bank of Japan may keep its rate at 0.10 percent at least through the second quarter of 2011, separate surveys show.

Bloomberg users are more pessimistic on bonds. The prospect for an increase in 10-year Treasury note yields rose to 70.1 in March, from 68.30 in February. The benchmark 3.625 percent Treasury due February 2020 closed yesterday at 3.70 percent, according to BGCantor Market Data.

Expectations for higher yields also increased in Germany, France and Switzerland. The index for German respondents increased to 70 from 69.08. Pessimism climbed to 68.75 from 66 among French participants. In Switzerland, the measure increased to 66.67 from 65.58.