Investing in the US Dollar

It appears as though the best deal last month was investing in the US dollar. Stocks went down, gold plummeted, and interest rates on US Treasuries fell. Meanwhile the US dollar rose in Forex trading in the EUR/USD, USD/YEN, and USD/CHF currencies pairs as well as most others. Investing in the US dollar and US treasuries was an even better deal as progressively lower rates at weekly auctions has raised the value of treasuries in hand. Confidence in the us dollar has risen as confidence in other currencies has fallen. The dollar has traditionally been the safe haven currency of choice although that fact has been called into question in recent years due to the mounting US debt. As the US withdraws from foreign conflicts and uses its military assets more judiciously Europe continues to deal with the debts of its Southern Tier. Greece, Italy, Spain, and Portugal are all dealing with potential debt default as their treasury notes mature. Greece is the constant subject of discussion as severe austerity measures do not appear to be sufficient to meet the requirement of lenders to forgive debt and pay notes coming due.

With the prospect of a second dip to the recession purchases of and futures in industrial raw materials has fallen off roughly ten percent while stocks across the world nearly as badly. The US dollar rose against all major currencies in the last month and several previously stronger minor currencies. That happened for the first time in a number of years. For the quarter the only investment better than investing in the US dollar were US treasuries by 6.4 percent versus 5.7 percent. Part of the rise of the dollar comes from investors seeking the dollar as a safe haven currency. Part is because both Japan and Switzerland have been purchasing other currencies in order to keep the franc and Yen from rising too fast. Forex traders are purchasing dollars because of liquidity as well as the prospect of the currency rising. The Yen and Swiss franc would also be good choices if it were not for the fact that each nation is actively its currency to drive its value down.

Until Europe finds an effective means of dealing with the debt crisis investors and currency traders are going to stay spooked. The flight to quality by investing in the US dollar may be more a flight to liquidity in the face of the Japan and Switzerland driving their currencies down. However, for the time being the dollar is the currency of choice. Fundamentals underlying the dollar include increases in construction and industrial production in the last quarter. The US is not especially dependent upon selling things to Europe – about two percent of exports behind Canada 19 percent Mexico 13 percent, China 7 percent, and Japan 4.7 percent. Also US banks do not have a high degree of exposure to the EU debt crisis. This leaves the USA in a stronger position than others as regards the debt crisis across the Atlantic and risk aversion in Forex is driving traders to investing in the US dollar.