By PINCHAS LANDAU
In recent months, the issue around which there was the greatest agreement in financial circles was the woeful state of the US dollar. The bon mot of the savants was that the American economy was in such a woeful state, and the increase in government debt under way and projected is so great, that the greenback was effectively toilet paper.
The main point at issue was whether the currency would collapse as a result of hyperinflation, or whether this supposedly inevitable outcome would be preceded by default, as borrowers around the globe - led by the Chinese - balked at buying any more worthless paper from Uncle Sam.
The dollar's value has indeed been eroding. This trend started in March, in tandem with the general turnaround in all financial markets - basically reflecting the ebbing of the fear and panic that had dominated the half-year following the Lehman collapse in September 2008. During the panic, the dollar and US government debt securities, served as the primary safe haven for investors fleeing every asset class and almost every currency on earth.
But when Federal Reserve Chairman Ben Bernanke rewrote the script for how to run policy in the face of a potential meltdown (a role for which Time magazine this week named him "Person of the Year"), the end of the world was prevented - at the very least, postponed.
The markets abruptly shifted from extreme fear to intense hope. Risky assets became popular again, and, with the cost of borrowing dollars now reduced (by Bernanke) to almost zero, the American currency became the preferred means of financing for every kind of investment. The "carry trade," in which investors borrow in a low-interest currency to invest in higher-yielding assets, returned to fashion - but this time it was the dollar, rather than the yen, that was the financing currency of choice.
Although the trend has been under way since March, the anti-dollar sentiment has become more intense in recent months. Yet, ironically, the dollar fell much less, and much more slowly, in the autumn months than it did in the spring and summer. The fierce rhetoric predicting imminent collapse for the US, its currency and its government paper, became increasingly detached from the market reality, even as it waxed ever more strident.
Until this month - when the dollar stopped inching down and started climbing back up. The first major crack came on Friday, December 4, when the American unit jumped some 3 cents against the euro and by similar percentages against most other currencies. Since then, the new trend has been one way: up for the dollar and down for the rest, although the extent of their decline has varied considerably.
The obvious question is: What caused this reversal? "Technical" analysts would argue that there was no need for a specific event or news item to bring about a change of direction: "Contrarian" logic says that if well over 90 percent of investors, advisers, etc., hold one view for a prolonged period, then the chances of the opposite happening - in this case, the dollar rising rather than falling as "everyone" expected - are extremely high.
Why? Because if "everybody" thinks the dollar is going to fall, then "everybody" has sold dollars and bought other stuff, whether euros, gold or whatever. At that point, any significant demand for dollars has a disproportionate impact on the price - because there is no comparable supply left to meet it.
But "fundamental" analysts insist that there must be a direct cause for market moves. Since this one began, as noted, on Friday, December 4, which was the day the November employment data were released, they attributed the dollar's jump to the improvement they discerned in this and other economic data relating to the American economy.
By the same token, the latest sharp move in the dollar/euro exchange rate - from 1.45 to 1.43 on Wednesday night (in trading in the Far East) - must have been linked to the previous day's statement from the Fed, following its monthly meeting, although it had said nothing new at all!
There is actually a perfectly valid and sensible fundamental explanation for the reversal in the global currency market. But it relates less to the US than to the rest, primarily Europe and Japan. Last week's column noted how the downgrades in Greece and Spain had refocused attention on the PIGS countries within the EU (or PIIGS, if Ireland is included). This week, the situation in these countries worsened.
Meanwhile, the Dubai default crisis rumbles on, although Abu Dhabi's willingness to cough up $10 billion to help Dubai provides at least temporary relief. Interestingly, the Dubai crisis broke on Thanksgiving, which is when the US dollar index hit bottom: i.e., when the trend in the currency market actually began to change.
The bitter truth is that the situation in Europe is far worse than that in the US because, despite the relative solidity of the Franco-German core, the peripheral EU countries are in dire straits - as is the UK. Japan's problems are even worse, but they have been exacerbated, rather than ameliorated, by the new government elected in August.
In a world mired in crisis, the currency market is a financial "ugly parade," wherein the ugliest currency is dumped. The argument that the dollar was the ugliest by far sounded plausible and held up as long as the underlying ghastliness of the euro could be obscured by financial cosmetics. But now that it's been revealed again, the dollar suddenly doesn't look so horrible after all.
landaup@netvision.net.il
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