subject: Global markets could tow a new line if the US Dollar loses its' safe haven status. Is this a real possibility? [print this page] Global markets could tow a new line if the US Dollar loses its' safe haven status. Is this a real possibility?
Q: Why is the US Dollar a safe haven currency?
A: Put very simply the US Dollar benefits from being perceived as the 'safe haven' currency. As well as being used in America -the worlds largest economy it is also used internationally (throughout the Caribbeanfor instance)and accepted in many other economies (China is a prime example).
For this reason it is fairly reliable as it weakens with very heftyconsequences -more so than any other currency. On top of thismanycommodities (including gold) are priced in Dollars whichelevatesthe importance of the Greenback.
Q: So how big is the American economy?
A: In all honesty a pretty ridiculous size, its nominal GDP is approximately a quarter of global nominal GDP and as an interesting stat 40% of the worlds billionaires are American. Interestingly though it is predicted to be overtaken by the Chinese economy in twenty years time.
Q: But isn't the American economy suffering?
A: Yes. Like a recovering alcoholic America is struggling to its' feet. Interest rates remain very low at 0.5% and vitally unemployment sits at around 9%. Furthermore the Housing industry that has led America out of 7 of the last 9 recessions still seems to be stuttering. Whilst inflation levels also remain very comfortable it seems that an interest rate hike is further off for the US than other major Western currencies, such as EUR and GBP.
Q: Where is the proof that the US is no longer a safe haven?
A: During times of political unrest or global uncertainty we have always previously seen a flight to safety' effect, the USD strengthened during the Irish bailout against most majors (as did the CHF and JPY) but whilst unrest has spread from Egypt to other areas in the Middle East, namely Libya and Bahrain we have seen the USD weaken against most majors in the last month the Greenback has lost 3.5% vs CHF, 1.6% vs GBP and 1.63% vs the EUR.
Q: Why has it lost so much against the Swiss Franc?
A: This is the currency that is the biggest threat (short term) to the US Dollar safe haven status. Economically Switzerland is still fairly strong and away from issues that plague many of the worldwide economy. The CHF is now trading at record highs, a concern to the SNB (Swiss National Bank) who have tried to artificially weaken the currency in order to keep exports competitive. Although this has ultimately been unsuccessful it could prevent the Franc from becoming the new safe haven currency for the foreseeable future.
Q: Couldn't the Dollar be weakening due to ballooning oil prices?
A: Yes. It is true that unrest in the Middle East and particularly the precarious state of the Suez Canal has meant Brent Crude Oil prices soaring to well over $100 per barrel. As the world's biggest user of oil this has certainly lead to some Dollar weakness, however this is not significant enough to justify losses vs risky currencies, such as Sterling and the Euro during this period as discussed earlier in the article.
In conclusion
I don't believe the Dollar will ultimately lose it's safe haven status to the Swiss Franc, it is simply too big a player to be ignored for long and its very unlikely its economic difficulties will be allowed to last to go too much further (you would hope!). Certainly the Swiss Franc is the in thing' at the moment in regards to currency and I wouldn't expect the Dollar to benefit as readily as it would due to the emergence of the Franc as a perceived safe haven for now. However if the CHF does offer some short term threat for the Dollar it is the Chinese Yuan that really could compete in the long term, as the Chinese economy looks set to leap-frog the American economy as the largest in the world in around 20 years time.
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