The greenback is flying high. In trade-weighted terms – against a basket of six major trading partners’ currencies – it has hit levels not seen since early 2006. During a crisis when the main question is which currency is “the least weak”, says Michael Ramon Klawitter of Commerzbank, the dollar is being bolstered by its status as a traditional safe haven and the world’s reserve currency. Foreign holdings of Treasury bonds rose by $456bn in 2008 as risk-aversion rocketed, while worries over the financial system and the global economy have deepened this year.
Jittery US fund managers – who hold $30trn of domestic and foreign securities, and whose share of overseas assets more than doubled over the past ten years – are paring back their overseas exposure as they usually do in troubled times, says Peter Garnham in the FT. Also underpinning the greenback is the fact that global banks, notably European ones, built up major dollar positions that they have had trouble funding since the credit crunch struck, so there has been a scramble for dollars in the international banking system.
Meanwhile, the dollar continues to benefit from a “lack of credible alternatives”, says Klawitter, given that the macroeconomic outlook outside the US seems just as bad, or worse. The yen is being buffeted by the deepening downturn in Japan, which has taken some of the shine off its safe-haven status. The euro is out of favour, given Europe’s exposure to the eastern European crisis. Capital Economics sees the dollar later this year reaching $1.10 to the euro, from $1.25 now.