Despite a weak climate, the dollar has surprising muscle

Despite a weak climate, the dollar has surprising muscle

Washington: Stock markets are swooning, credit markets remain frozen, and some foreign officials are predicting that the US will lose its status as a financial superpower. And yet the dollar—the most visible symbol of America’s financial might—is surging.

Last week, the dollar rose to its highest level in more than a year against the euro, the Canadian dollar and several other currencies.

It rose even after the Bush administration’s rescue plan for banks had initially foundered in Congress and even in the wake of a dismal employment report on Friday.

On Monday, the euro declined to a 14-month low of 1.3542 against the dollar.

The dollar’s surge seems counterintuitive. Previous financial panics—in Asia, Russia and Mexico—devastated the local currencies, as foreign investors stampeded for the door. The Thai baht, the Russian ruble and the Mexican peso were reliable barometers of confidence of foreigners in those emerging markets. As confidence crumbled, their exchange rates did, too.

But the dollar is not like any other tender. As the de facto reserve currency of the world, it benefits from global upheaval, even those that originate in the US.

“It’s ironic, given that we just messed up big time, the response of foreigners is to pour more money into us," said Kenneth S. Rogoff, an economics professor at Harvard. “They're not sure where else to go."

On 17 September, when the collapse of Lehman Brothers Holdings Inc. sent stock markets around the world reeling, foreign investors rushed to buy treasury bills, driving down the yield to nearly zero.

That reflected the fact that investors were flocking to the safety of the US government, even if it meant their investments would lose money when adjusted for inflation.

Indeed, the appeal of the US reflects a lack of better options. Much has been made over the last few years about the rise of the euro as a rival to the dollar.

But Europe hardly looks like a safe bet now, with its own crisis metastasizing.

Japan’s banks are far more stable than those in the US or Europe, which has made the yen the only major currency to rise in value against the dollar in recent weeks. But Japan, and Asia as a whole, is weakening, along with the global economy.

“It's like the world is full of sick people," said Ashraf Laidi, the chief currency analyst at CMC Markets Plc., a trading firm. “The US was the first to check into the hospital, and went into intensive care. But then other countries started to feel the chill, and now they're checking into the hospital."

Currency traders, Laidi said, are betting that because the US was the first to falter, it will be the first to recover.

The dollar has also been propped up the Federal Reserve, which has set up a network of currency swaps with the European Central Bank, the Bank of Japan, the Bank of England and other central banks to supply dollars to foreign banks. Acting on an unprecedented scale, the Fed expanded these swap lines by $330 billion (Rs15.6 trillion), to $620 billion.

The resilience of the dollar amid such turmoil is more than an economic novelty. As long as it retains its value, the dollar’s strength makes it easier for the US to finance the $700 billion bailout, because the cash will come from bonds sold largely to foreign investors.

But a stronger dollar has a downside: It makes American exports more expensive in foreign markets, which could dampen one of the few parts of the American economic engine that is still humming.


Rupee at 5-yr low as markets fall

Mumbai: The rupee weakened to the lowest level since February 2003 as losses in stocks prompted global funds to reduce holdings.

It dropped for the second day after the Bombay Stock Exchange’s Sensex fell below 12,000 points.

The local currency is headed for its first annual loss since 2001.

Data from the stock market regulator show overseas funds sold more Indian shares than they bought for the fifth month through September.

The rupee fell 1.5% to 47.81 against the dollar at close in Mumbai, the lowest close since 14 February 2003, according to data compiled by Bloomberg.

It may decline to as much as 48 in the near term, said Paresh Nayar, head of currency and debt trading at Development Credit Bank Ltd in Mumbai.

(Anoop Agrawal / Bloomberg)