Long viewed as a safe investment in times of economic turmoil, the US dollar, also known as ‘Greenbacks,’ may be losing its safe haven appeal as it suffers strong downward pressures resulting from rising oil & commodity prices, high Federal budget deficits, soaring national debts and economic uncertainty in the aftermath of several financial crises. No other vehicle has risen to replace it, but Gold and other commodities, such as oil, seem to be favored alternatives. Soaring oil prices, driven by upheaval in the Middle East, high volatile and risky equity Markets have made investors uneasy, and thus more likely to find ‘safe havens.’ A flight to the dollar usually accompanies increased risk aversion. But not this time. While other traditional havens, such as gold, the Swiss Franc, and the Yen have benefited, the US currency has suffered. “It seems the dollar’s haven status has vanished,” says Steve Barrow at Standard Bank. “And, even for long-term dollar bears, this is a worry.”
Interactive Media: Currency Conversion Comparisons
The main reason for the Greenback’s underperformance, say most Global Market analysts, is concern about the effects of high Federal deficits and rising oil prices. The Greenback has dropped to a record low against the Swiss Franc and fallen 2% vs Y81.82 against the Yen in the past two weeks, just shy of the all-time low of Y79.7 it hit against the Japanese currency in 1995. It has also lost ground against the Euro and the British Pound Sterling. In fact, the US Dollar is now at or near parity with the Canadian Dollar at 97.2% vs one USD – yet still a better alternative safe haven investment currency to many investors, myself included.
The fear is that higher oil prices will lead to a transfer of funds from oil-importing countries to the sovereign wealth funds of oil-exporting nations. Mansoor Mohi-Uddin, global head of FX strategy at UBS, says such funds tend to keep a low proportion of their assets in US markets compared with traditional central bank reserve managers. “Thus the greenback is also being undermined by fears that higher oil prices will lead to increased sovereign wealth fund dollar diversification activity,” he says. While another trader, Kit Juckes, head of FX research at Société Générale, argues that the dollar’s under-performance reflects what he calls a “risk-averse but yield sensitive” environment. And John Hardy, FX strategist at Saxon Bank, says the dollar is also suffering because of the Fed’s lack of credibility on inflation, given the risks of a continued rise in oil prices. “The market assesses that the Fed will ignore inflation and launch a third round of quantitative easing, as it prefers to concentrate on its growth mandate, while the rest of the world’s inflation-focused central banks hike rates to deal with the inflation threat,” says Hardy.
Interactive Media: Quantitative Easing Explained
Other factors are eroding the Greenback’s appeal as well. The fact that China and other emerging nations have been calling for a better global reserve currency alternative to the US Dollar weighs on our exchange rate. In addition, the United Nations recently issued an influencial report calling for Special Drawing Rights (SDRs) – a basket or index composed of several globally representative currencies, managed perhaps by the IMF – as an alternative to dependence on the US Dollar, or any other single currency. That idea seems to be gaining traction in Global Market circles.
Although unlikely, some analysts cite factors such as the risk of political upheaval in a divided Washington, possible additional military actions in the Middle East, the South China Sea, or elsewhere, as factors exerting downward pressure on the US currency. Read more here…
Sources: IMF.org, Bloomerg, FT.com, CNN Image: www.marketoracle.co.uk
