The dollar will rise against the euro in the first quarter as investors focus on the superior returns available in the U.S., while Europe struggles with a sovereign-debt crisis, according to Standard Life Investments. Higher Treasury yields relative to bunds will support the dollar against the euro, Ken Dickson, investment director of currencies at Standard Life in Edinburgh, wrote in the company’s quarterly global outlook received yesterday by e-mail. The euro will suffer until policy makers restore market confidence by increasing the size of a bailout fund and issuing joint euro- region bonds to support indebted nations. The fund manager is also buying the British pound, and selling the yen, according to the report. “The better relative yield story will become increasingly important in the first quarter of 2011, providing a fresh incentive to hold U.S. dollars,” said Dickson, who helps manage the company’s $175 billion in assets. “This will be underpinned by the relative attraction of the dollar compared to the euro, due to the ongoing sovereign-debt crisis.” The dollar gained 7.1 percent against the euro last year as Greece and Ireland turned to the European Union and the International Monetary Fund for bailouts and investors favored the relative safety of U.S. assets. The 17-nation currency is little changed this year and traded 0.1 percent stronger at $1.3379 as of 10:37 a.m. in London. European finance ministers meet next week amid speculation that they may extend help to Portugal, increase the size of their aid reserves, lower interest rates on bailout loans and authorize purchases of outstanding bonds. ‘Next Sovereign Crisis’ Policy makers can help to calm the market by raising the size of the European Financial Stability Facility, conducting credible bank stress tests and issuing common bonds guaranteed by all members, the report said. “The risk is that the next sovereign debt crisis may very well involve a rather larger economy than has so far been the case,” said Dickson. Ireland’s gross domestic product accounted for 1.8 percent of the euro-region’s 9 trillion-euro ($12 trillion) economy in 2009, with Portugal at 1.9 percent and Greece at about 2.6 percent. Spain represented 12 percent, with German output amounting to 27 percent. The 440-billion euro EFSF was set up in May and underwritten by euro-area governments. Ireland on Nov. 28 borrowed 17.7 billion euros from the facility as part of an 85- billion-euro package to plug the fiscal holes from the bursting of its property bubble and near-collapse of its banking system. Ten-year U.S. Treasuries yielded 53 basis points more than equivalent-maturity German bunds on Jan 5, the most since June. The spread narrowed to 31 basis points today.

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