Thursday, September 22, 2011

Is the US dollar a "safe-haven" currency anymore? King Dollar may be demoted to Prince in the future...

This article in the WSJ today emphasizes one of the determinants that cause an increase in the demand for a particular currency: A currency as a "safe-haven" against loss or depreciation. 

If a holder of a particular currency is unsure of its immediate or future value, they may elect to exchange it for a currency they believe will, at the minimun, maintain its value.

According to the article, there is not a firm consensus as to which currency is a dependable safe-haven. The dollar historically has played this role, but not so much today. 

Investors Show a Yen for the Dollar

""There may be no lack of investors seeking safety, but there is a shortage of safe havens in the currency market.

That was in evidence during Thursday's global rout in financial markets, when just about the only islands of strength were the U.S. dollar and the yen.

It isn't lost on investors that both the U.S. and Japan have significant fiscal and economic woes. But when markets turn scary, the ease of trading in both countries' currencies and in their deep underlying bond markets overwhelms those longer-term concerns.

The Swiss franc, long a traditional safe haven, has been largely taken out of the equation by the Swiss National Bank's efforts to cap the currency's rise, and it declined about 1% against the dollar Thursday. Even gold fell 3.7% on Thursday, as investors cut back on positions after the metal's long march higher. Currencies recently touted as safe havens, such as the Norwegian krone and Swedish krona, both lost about 2% against the dollar.

In times of trouble, "at the end of the day you just buy dollars," says Gravelle Pierre, founder of Iron Harbor Capital Management. ""

Since the early-September move by the Swiss, investors and analysts have been sifting through the ranks of the world's currencies for replacement safe havens. Like many hedge funds, Iron Harbor's Mr. Pierre would in the past include purchases of Swiss francs when making defensive moves. "The market has always looked at the Swiss franc as a store of value…now there is one less outlet," he says.

Among those passed under the microscope as possible replacement safe havens were currencies from Sweden, Norway, Canada, Australia and Singapore. While those countries are seen as offering up varying degrees of protection, many say the list of places to park money when times get tough are down to just the dollar and yen.

"You have to live with risk—there are no true safe havens anymore," says Jose Wynne, strategist at Barclays Capital.

The main arguments in favor of "Nokkie" and "Stokkie," as traders call the currencies of Norway and Sweden, are healthy budget and current-account surplus sported by both countries. Having a current-account surplus often is seen as a key metric for safe-haven status. It suggests a country isn't reliant on foreign borrowing that would flee in times of trouble.

But there are shortcomings with both currencies, many say. For starters, both economies are closely linked to the euro zone, which reduces their usefulness as a haven from the European debt crisis, say analysts at Barclays. In 2010, Sweden did 43% of its trade with euro-zone countries, and Norway 37%, Barclays notes.

Norway's fortunes are seen as closely linked to oil prices, which in a major economic crisis would likely tumble as they did in 2008.

That dependency on commodities is also seen as an Achilles heel for Canada and Australia, which otherwise score strongly as safe havens from a fiscal policy standpoint. And those currencies, having reached record highs against the U.S. dollar, both fell back below parity on Thursday.

The biggest knock against the alternatives to the Swiss franc are that the markets aren't deep or actively traded enough to efficiently handle a massive rush of investors scrambling in and out during a period of turmoil.

HSBC noted, for example, that turnover in the Norwegian krone and Swedish krona, along with the Singapore dollar, which is also nominated by some as a safe haven, each is equal to less than 15% of the daily trading in the yen.

Norway's government-bond market, meanwhile, is a relatively small $81 billion, according to Barclays.

"If the bond market is just too small, and the assets appreciate before you get hold of them, it undermines the returns from the safe haven," says Ken Dickson, investment director for currencies at Standard Life Investments. The size of Norway's bond market makes it prone to volatile trading "and undermines the Norwegian krone as a serious alternative."

When it comes to Sweden, Credit Suisse strategist Daniel Katzive says investors looking for a safe haven shouldn't be fooled by the country's current-account surplus. "Foreigners own more Swedish assets than the Swedish own foreign investments," he says. "In a crisis, when that foreign money goes home, it's not a currency that would do well."

The bottom line for safe havens, Mr. Katzive says, is that during times of crisis investors tend to bring money home. That is at the heart of the dollar and yen's role as safe havens, he said. "When things go really wrong, investors don't go out and take FX risks," he says.
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