Strong Dollar, Weak World

Not long ago, economists were declaring the end of the dollar as the World’s Reserve Currency. As crude oil climbed and other currencies surged against the dollar, it looked like the good ‘ole Greenback was done for. Investors flocked to international markets and were rewarded for their efforts. Not only were global investors gaining from better returns overseas, but they also gained in currency translation. The dollar was falling and international holdings benefited.

Then Came the Credit Crisis

When the first signs of subprime mortgage problems hit last July, currencies were hardly affected. In fact, most major currencies continued rising against the dollar. However, the international markets lost their appeal this past summer. Commodities fell in expectation of lower growth abroad and non-US currencies took a tumble.

The Dollar Surges

Though it’s tempting to say everything is falling, that’s not exactly true. The dollar’s rise has been nothing short of amazing. A weekly chart (see above) shows the dramatic fall of the euro against the dollar. In mid-summer, the euro hit a double-top against the dollar, then crashed. The Canadian dollar fell to a similar fate as it broke congestion and dropped. Similar statements could be made about other currencies – that’s why Deutsche Bank is now buying the dollar.

A Return to US Treasurys

What seems to be happening is a ‘reversion to the mean’. Chartists talk about prices moving back to the moving-average levels after the market rises or falls to unsustainable levels. The average is what investors like – what they’re comfortable with. Investors seem to be comfortable with US debt, so that’s what they’re buying, and that’s why the dollar is rising.

Will the trend hold? That’s the billion dollar question. Deutsche Bank thinks so. As long as things continue, we suspect the same thing. Investors caught the fear bug and until they stop buying Treasurys, the dollar will continue surging.

Right now, U.S. stocks seem more attractive than international stocks. Emerging markets are returning to their status as ‘sector’ funds and investors are reverting to the mean of the dollar as the world’s reserve currency. Greenbacks are the best game in town. Time will tell if the trend continues.

Right now, that $100,000 you have stuffed in your safe at home doesn’t seem so bad after all. Just don’t forget the combination to the lock!