The Dollar as Beauty Queen
Like the great American humorist, Samuel Clements ( Mark Twain), reports of the death of the dollar have been highly exaggerated. I follow commentary and developments in the currency markets, and there has been a downbeat attitude about the dollar for years, especially from those who fail to understand the strength of greenback as the ultimate reserve currency.
If we line up the current levels of American unemployment, GDP, budget deficits and the current account deficit, the dollar can be made to look like a pig. The problem, though, is that a currency’s value is never a matter of absolute value. It’s always about relative value.
Certainly the absolute picture of the American economy is gloomy. But, then, so is almost everybody else on the world stage. In Europe, both the developed and developing nations are worse. Their banking crisis is similar to ours, and their exports are falling fast, as the recession strikes all parts of
Euro/Dollar–Feb 08 to Present
the continent. A look at the euro/dollar chart above doesn’t inspire confidence in that currency as a replacement for the dollar. The euro has fallen about 20% since July of 2008. For economies that are dependent on exports, their currencies are vulnerable to world demand.
Asia is also in a world of hurt. Only China and India are reporting continuing growth, and even in these engines of growth, the growth rates have slowed dramatically. China has had tens of thousands of export-oriented plants close down recently, and is pushing an army of millions of unemployed workers back to their rural villages, seeking to scrape a bare living from tiny farming plots of less than a tenth of an acre in size.
The Japanese Yen is the only major currency that has appreciated with respect to the dollar, as the chart below shows.
Dollar/Yen–04/07 to present
The yen, however, is not rising against almost all currencies because of the strength of the Japanese economy. Quite the contrary. Japan is rapidly descending into a major recession. The reason the yen is strong now is because a decade of being the borrowed side of the carry trade means that those who are exiting the carry trade must now purchase yen to square with their brokers. The “strong” yen is not helping Japan, it is, in fact, increasing the devastation. A strong yen means that prices of Toyotas, Sony TVs, and everything else Japan sells to the rest of the world are increasing in price just when they need to be falling.
Since the world wide recession began, the dollar has actually risen in value. The flight to quality phenomenon is well known, and with economies crashing all over the globe, the greenback has regained its allure as a safe place to be, relative anywhere else.
The flight to quality effect is also seen in the price curve of U.S. Treasuries . In the chart below, the iShares ETF, IEI, shows how the price of 3-7year Treasuries has risen since the global slowdown began.
Since its low in late June of 2008, this ETF, which holds only Treasury obligations, has risen about 7.5%. Much of this rise was because of the repatriation of dollars that had flowed to emerging market equities and debt obligations during the boom period. But, now that the currencies of almost all the emerging markets have tanked (30-50% declines in the last year), those monies have flowed back into U.S. dollars to be used to purchase Treasuries.
The reserve role of the dollar continues to define its resiliency as a safe haven in a turbulent market. The dollar is not imperiled. It is prospering, and will probably continue doing so for a long time to come.
