Why The Dollar Will Remain King

by: Jay Okon

The U.S. dollar, by all recent accounts, is under serious pressure from a domestic as well as an international perspective. At home, the recent financial crisis and pending fiscal cliff has called into question America's long-term stability, which can have a profound effect on the value of the dollar.

Abroad, whether through nationalistic or simply economic interests, the Europeans and Chinese are making a play for reserve currency status. Would a country want to bear the global economic responsibility that would come along with having reserve currency status? Those who argue for a bigger role for other currencies would have to consider these factors.

The Chinese so far have resisted international pressure to stop devaluing the Yuan, and because of its governmental structure, maintains tight control over its financial markets. Most bankers and investors would be hesitant to invest in yuan-denominated assets that may be either illiquid or difficult to trade. And the current bailouts of Euro countries and economic policy disputes that now plague the European Union highlight the problems with a supranational currency.

The United States is considered to be a liberal, capitalistic society with financial markets that, although they are heavily regulated, are very liquid and virtually unfettered. Because of these factors the dollar, is considered to be the safe haven that the world runs to in times of crisis.

There may come a day the dollar will have to share its position as favored reserve currency, but as long as America remains politically, economically, and socially stable, the dollar will remain king. Investors can take advantage of the dollar's dominant position by investing in US treasuries, in particular the 10-year Treasury bond.

Although yields have been under pressure lately due to weak economic data, 10-year yields, for 17 consecutive trading sessions, opened and closed on Wednesday within 5.5 basis points of 2%, according to an RBS note released on Thursday morning.

In a relatively low inflation environment and with most US stocks under pressure, the 10-year bond may be the safest bet for investors at this point in time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.