Sunday, September 25, 2011
Dollar gains - liqudity is still king
There has been a lot of negative news concerning the US which should give any investor pause before buying dollar assets. The US gets downgraded in August after a bruising debt ceiling fight. The current politics create gridlock with a US presidential election a year away. Interest rates are close to zero on the front-end and more flattening is coming with operation twist. The economy is slowing and economists are forecasting further declines. Government debt is still growing and is at level that will suggest a dampening of growth. No model suggests that the dollar should improve.
Yet, the dollar is having one of its best months ever. Money is flowing from all of over the world. Central banks are still buying dollars. Banks borrowing in dollars. Money for safety is moving into the dollar. Risk-off and financial safety is driving the dollar. This only means that the rest of the world is in worse shape than the US. While this is likely when comparing with Europe bu the strong grwoth of emerging markets are also being discounted. Japan and switzerland as safe havens have centrla banks that are actively intervening to limit any appreciation. The safe commodity currencies are being avoided in this slowdown. When all else fails, buy the dollar. The safety aspect will offset any negativity in the short-run. Liquidity is king and the dollar still has that in its favor.