No longer safe or sound
WITH disappointing datasets coming out of the US – from employment to house prices – and equity markets looking shaky, some analysts have started to question whether this could be the beginning of the end for the greenback as the world’s “safe haven”. While such scenarios are usually imagined to play out over five- or 10-year periods, some traders are increasingly basing their long-term investments on the dollar’s inevitable depreciation, seeing weak US data as underlining the ineffectiveness of quantitative easing.
Despite these dollar naysayers, the greenback is likely to hold up in the short- to medium-term. Even in light of the euro’s recent rally – it rose to $1.2644 yesterday – the Eurozone’s troubles won’t disappear quickly and there is a continuing scarcity of “safe” currencies. The rising price of gold is testament to the forex markets’ nervousness, with new record highs this year at $1,249 an ounce.
The US is undoubtedly in a pitiable fiscal state, with gross government debt at 83.2 per cent of GDP last year and forecast to rise to 109.7 per cent by 2015. But depiste this, BNY Mellon’s Neil Mellor says: “There is this delineation between fundamentals and what the dollar can be expected to do by virtue of its status as a safe haven.” Even during the post-Lehman equity crash, for example, the dollar only dropped temporarily against the yen and strengthened against the euro (see chart).
For most forex traders, it is hard to imagine that this strength won’t continue – there is simply nowhere else to go. CMC Markets’ Michael Hewson underlines the point: “The US, having been a reserve currency, is always going to be a haven of last resort. The Chinese own a cart-load of US Treasuries so (the Fed has) got a captive audience in terms of buyers of their papers.” That “cart-load” is valued at around $1trillion, meaning that even if no one else buys US Treasury bills, China must do so to prop up its reserves’ value.
But for Ashmore’s Jerome Booth, this view is short-sighted. He sees the financial crisis as a wake-up call to investors that “there is no such thing as a risk-free asset”. The notion of a “safe haven” is therefore hubristic. Even without the doomsday scenario of a depression, he argues that the safest bet is now not the dollar but emerging markets. Comparing the dollar to its mean is a flawed approach in this view: “If the structure changes over time, (it’s) not necessarily going to come back to the mean. The appropriate parallel is the 1930s, not the mean.” He thinks the dollar needs to depreciate by around 30 per cent.
Of course, even if Booth is correct, the medium- and short-term are still likely to see
flights towards the greenback as a perceived cushion against risk. But the question for
traders who take Booth’s bearish view is not if, but when in the next decade to start
selling the dollar.