Markets are so fragile at the moment that almost anything
can spook them. The death of North Korean dictator Kim Jung-il caused the
dollar to spike up and commodity currencies such as the Aussie dollar to weaken
Any sign of instability sends everyone fleeing for safety.
And these days that means the US dollar. It has always been the world’s trading
currency, but now its position as the global reserve currency is stronger than
ever.
What choices are there? The Swiss and Japanese are capping
their currencies to prevent them becoming too strong and, therefore, flooded
with investors’ cash.
Meanwhile, the debt crisis in Europe has blown the single
currency’s hopes of becoming the investors’ darling out the water.
Unlike most countries, the US is relatively relaxed about
having a strong currency as exports only represent around 13pc of its economy.
It is no wonder the US dollar is riding the crest of a wave,
ending 2011 at its highest level of the year against the euro. It has been
boosted by some surprisingly positive news lately.
“Consistently positive economic data including an
encouraging fall in unemployment has paved the way for this strength,” says
Stuart Rogers, Senior Private Client Dealer, Moneycorp.
“And there’s no reason why the greenback cannot continue on
this trajectory. However, before the US can celebrate too wildly, eurozone
weakness has had a lot to do with the dollar’s resurgence as well as
uncertainty in Asian markets caused by the death of Kim Jong-il. And with
China’s economy slowing down, investors are seeing the US Dollar as a safe
haven once more as there is little other option among the major currencies.”
Jeremy Cook, chief economist of World First is more
sceptical about the positive data. He believes the good job figures are a
result of people taking on part-time work in the run up to Christmas rather
than an underlying tick up in employment. “The dollar will remain a risk
barometer as long as the European problems persist and remain to be the main
influencer of global markets,” he says.
The dollar is expected to continue on an upward curve into
2012 despite the fact that it has not brought in aggressive spending cuts.
Without the sort of austerity measures introduced in the UK, the US can mask
the true state of its economy.
[…]
Alistair Cottonof Currencies Direct says: “The
prospect of further quantitative easing is seen as risk-on, which sees the
dollar sold off, and vice versa if the Fed rules out further easing.”
[…]
At the moment, while everyone is risk averse the dollar
benefits. This spells bad news for the commodity currencies of South Africa,
Australia, New Zealand and – to a certain extent – Canada. They benefit when
people are prepared to take a risk and they have weathered the economic storms
since 2008 remarkably well.
But the troubles in Europe and the slowdown in China’s
formerly booming economy have taken the shine off these previously popular
currencies.
“Commodity-backed currencies will most likely suffer into
next year as the US dollar strengthens,” believes Smart Currency’s Ryder.
“However, this should help bring many of the currencies back to more 'normal’
levels.”
By Liz Phillips
Original Source: Telegraph - Forex Focus Click
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