Currencies | Jun 25 2009
;By Chris Shaw
According to TD Securities, there is historical justification for the US dollar being the world’s safe haven currency given the previous dominance and strength of the US economy, but the group’s global strategist Stephen Koukoulas suggests there is now little to support the relationship given the US economy is very weak.
In recent weeks the relationship has held up reasonably well as the dollar has rallied in times of increased market and economic adversity as investors chase greater liquidity and falls when investors return to more risky trades, a trend evidenced by the inverse relationship between equity prices and the US dollar.
But going forward Koukoulas doesn’t expect this will be the case as many of the problems contributing to the current global economic downturn emerged out of the US economy, which means there is even less reason to consider the greenback as a safe haven, especially when the US debt and current account problems are taken into consideration.
The other issue in his view is the low savings rate in the US, which makes the economy reliant on foreign savings to cover its deficits. If any problems ever emerge with this funding option for the US, meaning the US enters a situation where it has a funding deficit, Koukoulas sees the only outcome as further depreciation in the currency as the market comes to the view diversification is the new safe haven.
As Koukoulas subscribes to the weaker US dollar theory, the recent strength in the US dollar has been a problem in a trading sense, though it does, in his view, offer the opportunity for new short positions to be established.
In support, he suggests the recent recovery in investor confidence has been on nothing more than a rose coloured view of a few economic data releases that were less bad rather than actually being good but now with the data being questioned more closely there has been some unwinding of positions, so boosting the greenback.
CIBC World Markets agrees the data releases have been less bad rather than actually good, noting US data in particular suggests a slowing in the pace of the downturn rather than an actual turnaround to a position of improvement given industrial production is now 15% below its peak and the labour market has not yet bottomed out.
Looking ahead CIBC expects the still weak state of the global economy means there will remain periods of risk aversion as economic data falls short of what it views as relatively optimistic assumptions and as these occur there should be bouts of strength in the US dollar.
Such a trend should be temporary in its view though as once the global economy recovers in a more sustainable manner, and it suggests evidence of this could emerge after the third quarter of this year, the US currency should continue its weakening trend given quantitative easing by the US Federal Reserve and the large budget and current account deficits the US must address.
Danske Bank agrees, taking the view while the US dollar is still the market’s preferred funding currency and so as the trend in data waxes and wanes the US dollar will move acordingly, but longer-term the trend and relative financial positions tends to support a weaker greenback against the euro.
