INVESTORS have every reason to hate the US dollar. The rising deficit. The deteriorating economy. The plunging stock and bond markets. But rather than getting hammered by the financial crisis, the greenback is soaring. Since July the dollar is up 19% against the euro and 24% against the British pound. Whether it’s a boon or a burden depends on perspective. US companies with huge exports aren’t thrilled, since a strong dollar hurts sales even as US consumers traveling to Paris will find their cash buys more than before.
What’s behind the dollar’s surprising strength? First, there’s the fear factor. During tough economic times, investors often flee foreign currencies and other risky assets for safe havens like the US dollar. The euro, the pound, and emerging-market currencies may also have been inflated after a six-year run-up.
A basket of foreign currencies rose 25% between 2002 and mid-2008 versus the dollar. The euro jumped 45%. But earlier this year some investors started betting the bubbles would burst, driving down the price of the currencies and conversely benefiting the dollar.
After its recent strong performance, the dollar is currently trading at about $1.28 to the euro, what some figure is a fair price based on the current buying power of consumers.
“When the stresses start to abate, people will be forced to think about whether they want to invest in the US,” says Thomas Stolper, an economist at Goldman Sachs. But if the global economy continues to sour, the dollar may rise even more.
The European currency markets may also feel the stress from the global slowdown. The euro zone lacks a strong central government that can adjust rapidly to crisis. For example, the ECB has been criticised for not recognising the severity of the crisis early enough: It raised interest rates in July before cutting them in October and November. Says Stephen Jen, an economist at Morgan Stanley: “The dollar’s rise is genuine and more deserving than many sceptics have in mind.”