After all the concern that the U.S. is debasing its currency,the dollar beat stocks, bonds and commodities for the first timesince May as investors sought refuge from slowing growth andEurope's sovereign-debt crisis.

The U.S. currency rose 6 percent in September, according toIntercontinentalExchange Inc.'s Dollar Index, beating returns of1.6 percent by Bank of America Merrill Lynch's U.S. Treasury MasterIndex. The MSCI All-Country World Index of stocks in 45 countrieslost 8.9 percent, the largest monthly drop since May 2010. Rawmaterials measured by the Standard & Poor's GSCI Total ReturnIndex of 24 commodities slid 12 percent.

Gains for the world's reserve currency show investor confidencein the nation's creditworthiness after Standard & Poor'sstripped the U.S. of its AAA rating two months ago. Even withRepublican leaders in Congress joining critics of Federal Reservestimulus measures, the currency bested all 16 of its most-tradedcounterparts in September for the first month in more than threeyears.

“In a time of crisis you want to be holding the most liquidcurrency out there,” Aroop Chatterjee, a currency strategist atBarclays Capital Inc. in New York, said in a telephone interviewSept. 27. “It waters down the argument for 'the end of the dollaras a reserve currency.'”

Strategists reduced forecasts for the euro versus the dollar andsterling by the most since June 2010 last month. Predictions theCanadian dollar will gain against the greenback dropped the mostsince October 2008.

Dollar Gains
Hedge funds and other largespeculators who had held an aggregate bet the dollar would weakenfor 14 months capitulated, with more wagers on gains than lossesfor the first time since July 2010. Traders added the most bullishcontracts in the week ended Sept. 20 since January 2010.

Trades that expect the dollar to strengthen against the euro,yen, pound, Swiss franc and Mexican peso, as well as theAustralian, Canadian and New Zealand dollars, surged to 128,155 onSept. 27, according to Commodity Futures Trading Commission data ascompiled by Bloomberg.

The dollar strengthened 0.8 percent to $1.3387 per euro lastweek, extending its September advance versus the 17-nation currencyto 6.8 percent, bringing its gain for the third quarter to 7.7percent. The greenback appreciated 0.6 percent to 77.06 yen in thefive days ended Sept. 30, reducing its loss since June to 4.5percent.

Broad Increase
The Dollar Index, which tracksthe currency against those of six trading partners, had the biggestmonthly increase since October 2008, reaching 79.154 today, thehighest level since Jan. 20. The U.S. currency rose 8.2 percentagainst nine developed-nation counterparts in September, accordingto the Bloomberg Correlation-Weighted Indexes, the biggest gainsince October 2008.

Today, the dollar reached $1.3314 per euro, the strongest levelsince Jan. 18. It touched 77.27 yen, the highest level since Sept.15.

The dollar's 5.7 percent increase in the third quarter wastopped only by Treasuries, which rallied 6.4 percent, according toBank of America Merrill Lynch data. Sovereign debt in the rest ofthe world returned 3.15 percent, and AAA-rated U.S. corporate bondsgained 6.4 percent. The MSCI Index of stocks fell 18 percent andS&P's commodity index slumped 12 percent, the biggest quarterlydecline since the three months ended in December 2008.

Swiss Franc, Yen
Investors turned to the dollar as Switzerland and Japan intervenedto stem gains in their currencies. The Swiss National Bankannounced on Sept. 6 it would purchase “unlimited quantities” offoreign currencies to prevent the franc from strengthening beyond1.20 per euro.

The Bank of Japan sold 4.51 trillion yen ($58.5 billion) in thebiggest move in seven years in August, as the currency reached apost World War II-record of 75.95 per dollar on Aug. 19.

“The dollar's strength is as much by default as its ownvirtues,” said Alan Ruskin, global head of Group of 10foreign-exchange strategy at Deutsche Bank AG in New York bytelephone Sept. 27. “The dollar has attracted funds because there'snowhere else to go with that kind of liquidity,” and the U.S. isn'tfighting dollar gains, he said.

Carry Trades
Investors exited higher-riskassets by unwinding so-called carry trades, which use borrowings incurrencies of nations such as the U.S. with low interest rates tobuy assets in economies with higher yields, as volatility soared.The strategy lost 6.6 percent in September, the most since at least1998, when records began, according to an index compiled by UBSAG.

Implied volatility among major currencies reached the highestlevel since May 2010, according to the JPMorgan Chase & Co.'sGlobal FX Volatility Index.

The dollar makes up 60.2 percent share of the world's currencyreserves, more than double the 26.7 percent for the euro, which hasthe next biggest portion, according to the International MonetaryFund in Washington.

While S&P had used the dollar's position to reaffirm its AAArating in April, the company cited the weakening “effectiveness,stability and predictability of American policymaking and politicalinstitutions,” in its Aug. 5 downgrade of the U.S.

Calculation Error
S&P cut the rating byone step even after Treasury Department officials told the firm ithad overestimated future national debt by $2 trillion. S&P, aunit of New York-based McGraw-Hill Cos., said the error didn'taffect its decision. The company announced on Aug. 23 that it wouldreplace President Deven Sharma with Citibank NA Chief OperatingOfficer Douglas Peterson.

A Bloomberg survey of 1,031 subscribers found that 57 percent ofU.S. investors agreed with S&P's decision, compared with about75 percent of those in Europe and Asia. The quarterly review showedthat 72 percent of U.S. investors found the nation'screditworthiness good or excellent, while 45 percent of Europeansagreed and 42 percent of Asians.

While most of those polled backed S&P's downgrade, 35percent of investors said that overall the grades given by ratingfirms aren't reliable. Only 1 percent called them very reliable, 18percent fairly reliable and 45 percent just somewhat reliable.

Moody's, Fitch Affirm
Moody's InvestorsService and Fitch Ratings affirmed their top rankings on Aug. 2 andWarren Buffett, the world's most successful investor, said the U.S.should be rated “quadruple A” rather than AA+. The Securities andExchange Commission has also sent subpoenas to hedge funds as partof an investigation into whether some investors traded onconfidential tips ahead of the downgrade.

Republican Senate Minority Leader Mitch McConnell of Kentuckyand House Speaker John Boehner of Ohio wrote Fed Chairman Ben S.Bernanke a letter Sept. 20 urging him to refrain from more stimulusto avoid “further harm” to the economy.

Texas Governor and leading Republican presidential candidateRick Perry said in August that additional measures from Bernankewould be “almost treacherous — or treasonous.” China, Germany andBrazil said last year that the U.S. central bank was weakening thedollar to help exports.

The complaints may have helped the currency by narrowing policyoptions, said Shahab Jalinoos, a senior currency strategist for UBSAG in Stamford Connecticut.

'Negatives' Removed
“Some of the keynegatives for the dollar are also off the table for politicalreasons,” Jalinoos said by telephone Sept. 27, citing lesslikelihood of increased government spending and the central bankending its bond-buying program.

Gold, another traditional haven, retreated to $1,535 an ounce onSept. 26, the lowest for a most-active contract in more than twomonths. Prices fell 11 percent in September, the biggest monthlydrop since October 2008, after reaching a record $1,923.70 on Sept.6.

“Dollar is safer than gold at the moment,” John Stephenson, whohelps manage $2.6 billion at First Asset Management Inc. in Torontoand expects the metal to trade in the $1,600 to $1,700 range forthe rest of the year, said in a telephone interview Sept. 27.“Dollar and dollar assets have been the ultimate safe-haven assetsthroughout this crisis.”

Commodities Decline
Silver's monthly drop of28 percent on the Comex in New York was the biggest since April1980 and copper fell 24 percent in London, the biggest declinesince October 2008. The only commodities in the S&P GSCI indexto rise last month were live cattle, up 7.6 percent, lean-hogfutures at 5.9 percent and feeder cattle at 7.7 percent.

Investors fled stocks last month, wiping out about $4 trillionfrom global equity markets. Benchmark measures for 28 out of 45nations in the MSCI All-Country world Index posted declines of 20percent or more from their peaks, meeting the common definition ofa bear market, according to data compiled by Bloomberg. Among thecountries with the 20 biggest losses from their highs, 18 arelocated in Europe.

Netflix Inc., the U.S. online and mail-order video service, ledthe MSCI All-Country World Index lower last month, dropping 52percent, while Alpha Natural Resources Inc. plunged 47 percent.Netflix tumbled after Amazon.com Inc. and Microsoft Corp. unveiledcompeting products and its own rebranding alienated customers anddrove away investors.

'Risk Off'
“You heard all this talk of 'riskoff' and that's really what happened,” said Robert Carey, chiefinvestment officer at First Trust Portfolios LP in a telephoneinterview Sept. 28. The Wheaton, Illinois-based firm oversees about$50 billion. “There are a lot of questions about long-term fiscalissues both in Europe and here in the U.S.”

European policy makers last week heard calls from U.S. TreasurySecretary Timothy F. Geithner, International Monetary Fund ManagingDirector Christine Lagarde and U.K. Chancellor of the ExchequerGeorge Osborne to contain the region's sovereign- debt crisisbefore it drives the global economy into recession.

“Patience is running out in the international community,”Osborne said. “The euro zone has six weeks to resolve thispolitical crisis,” he said, referring to a meeting of Group of 20leaders in Cannes France scheduled for Nov. 3-4.

“There's been a change of attitude towards the dollar in thepast quarter,” Andrew Wilkinson, chief economic strategist atMiller Tabak & Co. in New York, said in a telephone interviewSept. 30. “And it will continue as the final quarter of the year isgoing to be challenging to find a risk-on environment.”

Bloomberg News

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