Dear CIGAs,
The US dollar is NOT a safe haven. It is actually one of the most dangerous places to be.
Let’s stop and think about this scenario:
There are mechanics to all things including consideration of the US dollar as a safe haven. Right now that consideration is a knee jerk reaction of glib provincial talking heads who have not considered the process inherent in that definition.
1. US Equities are sold and risk positions closed by US entities. US investors, traders and rank speculators put their funds in short term US Treasuries as they close their positions. What is the net effect on the US dollar? Absolutely nothing at all as no dollars are being sold into the international dollar market. No dollars are being purchased in the international dollar market either. Short rates will move lower on that demand. Nothing in that equation exists to bolster the US dollar.
2. International investors including US traders (in non dollar items) and rank speculators close US and international positions, putting their funds into dollar US Treasury instruments. In that case dollar instruments would be purchased. On balance dollars would be acquired with an upward influence on the US dollar.
However things have changed in the last year:
1. The Carry Trade has targeted the US dollar as the Carry Currency of choice because of the historic low Libor rate and the recognition that, at all costs, increasing rates on the dollar will be leaned against. US rates MUST STAY LOW because of the signs indicating a failure of the US economic recovery. The Carry Trade is no joke. the Carry Trade for the currency of choice is a serious value case of Swine Flu and is very long term.
2. The IMF, the World Bank, the United Nations, China and Russia, as well as many others have all panned the dollar. What makes you think that US Treasury instruments are the only short term treasury instrument investors can buy? Thoughts like that and statements of dollar safe havens from any source, no matter who they are, reflect a PROVINCIALISM all Americans have a hard time with or an unwillingness to think the process out.
Friday was quite interesting as the dollar safe haven was not there on the employment figures.
Believing in the US dollar as a safe haven now could well be a sucker ‘s wager.
Click here to watch the CNBC video titled "The Fate Of The Dollar"
