Why US Dollar fell during current crisis? Is financial chaos looming ahead………
By Shan Saeed
One of the more interesting aspects of the Libyan, Tunisian and Japanese crises was that the US dollar fell against major currencies— a lot. Normally, in times of crises, world investors tend to move into the dollar. It is viewed as a safe haven. However, during these crises, the dollar fell to historic lows against the yen, before massive international central-bank intervention reversed the fall. Financial market will remain uncertain in the next 2-years. You bet
Euro has also gained strongly against the dollar. Europe is in a messy situation that needs financial discipline. Most importantly, the Dollar Index, which weighs the dollar against a basket of foreign currencies, fell to 75 currently from 80 in January-2011. This may not seem like a big change, but in the currency markets, these changes are pretty dramatic. Although I wouldn't say this is the beginning of the end for the dollar, it is certainly another sign of what I think will be an increasing lack of confidence in the US dollar as a safe haven. Investors are moving into real assets [ gold and silver]and taking long positions in agri-commodities [ wheat, corn, soyabean, rice, sugar]to protect their wealth as they navigate through tumultuous times.
This change in psychology will be critical for foreign investors as inflation begins to move higher [ 5-7% according to Sam Zell---the billionaire Real Estate] and begins to more seriously affect foreign interest in U.S. bonds, and ultimately stocks as well [ Stock might take a 30% plunge going forward]. If foreign investors begin to decrease their massive support for U.S. stock and bond markets, both the dollar and those markets will begin to suffer an irreversible decline. Short term, I think the dollar is a bit oversold and will likely rebound somewhat in the near future.
There are always multiple reasons for such a fall in the currency — it’s not all just a growing lack of confidence in the dollar — and some of those reasons will change toward the upside. But it’s hard to overlook what is likely a growing sense by foreign investors that the financial condition of the U.S. government is weakening.
It is front-page news that the U.S. has too much debt and is doing little about it. In fact, is is only adding to it at increasing rates. Even worse, making it easier to add debt by printing massive amounts of money or QE or monetary accommodation, or interest rate stabilization or balance sheet expansion or QE 3.
Two of the most important indicators are foreign inflows of capital into the bond market and foreign flows into the stock market. By watching these indicators in the remainder of the year, you will be getting a better feel for whether foreign investors are getting increasingly nervous about the dollar. Muni bond due payment is around $135 billion. These kinds of changes don’t happen quickly, but when they do happen, they are hard to turn around.
According to JPMorgan Chase & Co. CEO Jamie Dimon, companies, insurance funds and investors would lose access to markets if the U.S. appears to be headed toward a default related to its debt limit.
“If the United States actually defaults on our debt it would be catastrophic” Dimon, said while addressing the U.S. Chamber of Commerce event in Washington. Asked further what may happen if the U.S. fails to increase its $14.29 trillion debt limit. He said: “Companies like us, every single company with Treasuries, every insurance fund, every requirement, it will start snowballing. All short-term financing would disappear.”
U.S. Senator Marco Rubio, a Florida Republican, has said he won’t approve a debt-limit increase without a range of tax-and-spending reforms. Moreover, he said: We need to use the debt limit itself as the way to ensure that America’s debt limit begins to decline, not always go up,” “How about the debt limit starting to go down? These are the kinds of things that I hope will be focused on.” Debt is expected to touch $19 trillion in the next 4 years.
Treasury Secretary Timothy F. Geithner has said the nation will suffer “catastrophic damage” if it loses investors’ confidence. He also has said it would be “unworkable” to give priority to payments on the national debt over other government obligations.
Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before making or entering into any financial investment or strategy. All financial transactions carry a RISK.