WASHINGTON: With the euro reeling from a budget crisis and the yen tarnished by political turmoil, the US dollar is stamping its mark as the top safe haven and international reserve currency.
Even a mounting debt problem in the United States is not posing an obstacle to the greenback’s ascent.
Just less than a year ago, China, Russia and France called for a new international reserve currency to end the dollar’s dominance, as the greenback tumbled on the back of record US deficit and debt fueled by financial turmoil.
But yesterday, the dollar has surged to successive four-year highs against the euro while foreign investors jostle to buy even more American debt as they see the dollar as the best safe-haven currency bet.
Thanks to the Greek debt crisis, which threatens to spread to other countries in the eurozone, the greenback has jumped by about 20 per cent since November versus the single European currency.
The euro on Friday fell below US$1.20 for the first time since March 2006.
The yen has also wilted on speculation that Japan’s new prime minister, Naoto Kan, would back a weak currency and actively encourage market intervention to stop the Japanese currency from appreciating to pep up exports.
“So, to the extent that the substitutes to the dollar get weaker, then the dollar itself looks more attractive even though we ourselves have our own longer-term debt problem,” said Morris Goldstein, a currency expert at the Washington-based Peterson Institute for International Economics.
“Some people describe it as instead of a beauty contest, as an ugliness contest and the question is who is the least ugly and right now, the least ugly is the dollar,” he told AFP.
The former International Monetary Fund official also said that troubles with the euro and to a lesser extent with the yen were also “going to make people more cautious about pushing plans for alternatives to the dollar.”
The dollar index, which tracks the US unit against a basket of six major currencies – the euro, yen, British pound, Canadian dollar, Swedish krona and Swiss franc has surged nearly 19 per cent since November when the European crisis started to worry markets.
“It’s a significant move over a relatively short period of time,” Andrew Busch, global currency strategist with BMO Capital Markets, told AFP.
He said the dollar’s role as the primary reserve currency has ‘absolutely been enhanced’ by the European crisis, raising the possibility that central banks might freeze their diversification out of the dollar into the euro that was stepped up last year.
“Reserve managers around the globe have increased euro in their currency mix to 27 per cent and I’m guessing they are feeling a bit bad about that right now,” Busch said.
China has a sizeable euro stake in its US$2.45 trillion reserves “and whether they openly admit it or not, they are worried about their investment,” said Kathy Lien, director of currency research at Global Forex Trading.
In their scramble to the safe-haven dollar, investors have even sidestepped data highlighting vulnerability of the world’s largest economy to another potential crisis.
The US public debt hit a record US$13 trillion mark last Tuesday, a ratio of nearly 90 per cent of gross domestic product, the broad measure of a country’s output.
For comparison, Greece, the epicenter of the European crisis, has a 115 per cent debt-to-GDP ratio.
In addition, the White House has forecast that the 2010 budget deficit will swell to a new record of US$1.555 trillion, more than 10 per cent of GDP.
Yet, there is an influx of investments into US Treasury bonds, a channel used by the government to borrow from the public to finance its burgeoning deficit.
On Friday, investors were willing to park their cash with the US Treasury for 10 years for an interest rate of 3.19 per cent, the lowest level this year.
“The dollar continues to enjoy support from a combination of global investor faith in the soundness of US Treasury debt and the accumulation of reserves by key emerging-market countries in Asia,” said Deutsche Bank analyst Peter Hooper.
But he cautioned that Asian countries might choose to move away from reserve accumulation gradually and called for a greater US priority on ending its fiscal problems, which could be compounded by President Barack Obama’s costly health-care reforms.
“Unless US political leadership comes to grips with the challenges posed by US health-care cost inflation to ongoing fiscal credibility, we feel the next major crisis or the next major phase of the current one could come about abruptly at some point in the years ahead,” Hooper said. — AFP