- Whenever a crisis does rock the global arena, even when the United States is at the core of the problem, the dollar rises.
- Standard and Poor’s downgraded the U.S. sovereign debt rating in 2011, the dollar rose more than 15 percent.
- The dollar remains the world's leading safe haven when everything is bad.
We have seen a good deal of dollar volatility and it has certainly lost some of its allure over the last few years. However, there is an age old adage that says what does not kill you makes you stronger. Could this be the case with the dollar?
We have seen analysts, who have written many articles, claiming the dollar's status as the world's reserve currency is at death's door and there has been good reason for this. Other countries are growing, economically, faster. The global financial crisis of 2008 destroyed investor confidence in the banking system. The measures, taken by the Federal Reserve (Fed) to recover from the crisis by keeping rates low and injecting the markets with money has weakened the dollar further.
However, whenever a crisis does hit, even when the United States is at the very center of the problem, the almighty buck rises. Looking at the dollar's value on a trade weighted basis, it gained 27 percent in 2008 to early 2009. This was when the collapse of Lehman Brothers was rocking the financial world. Then the dollar gained when the onset of the Eurozone's debt crisis gripped the world in 2010. It rallied nearly 20 percent then. When the Standard and Poor's downgraded the U.S. sovereign debt rating in 2011, the dollar rose more than 15 percent.
There is a long-term trend that is bearish. It is not a huge drop off but gentle. Still, when there is a crisis the world still flocks to the U.S. Dollar. To help illustrate this, let us look at the past few weeks. Since the beginning of 2014, there has been little in the way of risks. The Eurozone debt crisis has died down a bit, the Fed has successfully, a bit on the bumpy side, started to taper back its enormous asset purchase program, known as quantitative easing (QE), and with this the dollar has weakened. However, this month, it has started to strengthen again.
This past week, brought the news that the U.S. economy hit a major bump in the road as the GDP contacted by one percent for the first quarter. This was worse than was expected and the first time in three years we had seen a contraction in the world's largest economy. What was the response in the Forex markets? Nothing much. The euro barley made a gain against the dollar. Over the last few weeks the euro is down roughly three percent versus the buck. Since chart patterns are a big deal to currency traders, it is worth noting the EUR/USD is trading just below its 200 DMA, which indicates a bearish signal for the euro. See the below chart, created on my Meta Trader 5.
There are similarities when looking at the other trading partners for the dollar. The euro's rise stopped just below the key $1.40 level. The Sterling, has also fallen off a bit, as it stalled just below $1.70. The yen has also lost some momentum before $102.15.
Why? Fed Chair Janet Yellen has done a good job "jawboning." She has convinced the global financial markets that the end of QE does not mean rates will go up anytime soon. This weakens the dollar, but its effect is limited. It would appear, that the Forex markets has reached that limit.
There are other reasons not to put the final nails in the dollar's coffin. The chances of the buck losing its status of reserve currency are pretty slim, if none at all. There is a genuine lack of safe assets out there and this will help make sure the dollar remains the anchor of the global financial system. We have also seen world central banks, like China, buying U.S. assets and U.S. government debt is still widely held by foreign investors and governments. This means the world still trusts the United States to right its ship.
There is also the fact that Eurozone bonds and mortgage back paper are still not considered safe and China's own currency is still tightly controlled by Beijing. No other global market has the depth that the U.S. financial system has. Even if investors are worried by the state of the U.S. economy, and they do have some valid reasons to be, where would they put their assets? There are few places for them to go. Therefore, we must follow the logic and investors will continue to take shelter in the dollar.
The Fed has taken good measures to ensure the collapse of the dollar. The dollar has withstood so much, any other currency would be in serious trouble. They can now raise their rates, when ready and over the next several years, to strengthen the currency. There European Central Bank (ECB) will take steps, imminently, to combat deflation. This will weaken the euro versus the dollar.
It would appear, for the long term, the U.S. dollar has us all trapped. There is nothing better or safer. Bluntly, the world could do far worse than trusting its money in the United States of America and its financial system.
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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.