Dollar Shows Grace Under Pressure

Forbes ^ | 2/5/2009 | James Chen

[bruinbirdman]

The greenback holds up better than its fiat money counterparts, and the trend could have legs.

From all angles, the current economic misery in the U.S. is both severe and unrelenting. Day after day, the gloom and doom scenario, as reflected in newly released economic data, has had a sobering effect on those desperately seeking any glimmer of hope for the U.S. economy. So why does the U.S. dollar keep strengthening against its primary European rivals, and why is it likely to continue doing so, at least for the near term?

Several key factors are contributing to the buoyancy of the U.S. dollar against the European currencies, especially the euro. These include: comparative weakness of the underlying economies; perceptions of the relative speed to recovery; narrowing interest rate differentials and the enduring "safe haven" phenomenon.

Exchange rate movement for both the U.S. dollar and the euro recently has clearly been characterized not by comparative economic strength, but by comparative weakness of the underlying economies. While it is true that key economic indicators continue to paint a progressively bleaker picture of the U.S. economy, the situation is far from rosy in Europe. In fact, the Eurozone has been exhibiting very clear indications of falling ever deeper into a brutal recession, with all of its member economies weakening at a dramatic clip.

The big question these days when it comes to currency speculation is, "Which economy is furthest from catastrophe?" Because of the perception that the U.S. was earlier to recognize the impending economic crisis and was therefore earlier to attempt serious implementation of countermeasures, the U.S. economy has been considered less potentially calamitous than its European counterparts.

Related to this phenomenon of comparative economic weakness are widely held perceptions regarding the relative speed to economic recovery from this global recession. With a

[flash2368]

I wish I could agree with the Forbes article however I believe it is wishful thinking. With billions of dollars created out of vapor as a “stimulus”, and the U.S. importing itself into the poorhouse, I fail to see how the dollar can stand up against the reality that the U.S. is essentially bankrupt and that will sooner or later be reflected in the value of the dollar.

[familyop]

If we focus on Europe, the dollar doesn’t look too bad. ;-)

[Mind-numbed Robot]

Compared to the rest of the world the dollar still looks strong despite the points you make. Strength in currency is always a comparative thing.

[bruinbirdman]

"If we focus on Europe, the dollar doesn’t look too bad. ;-)"

Or Africa, Russia, South America, or Asia minus Japan.

For all the doom and gloom about the almighty greenback, Uncle Sam has no problem with flight from the buck. Speculators, even nations, might try to make a profit by trading international monetary fluctuations. When all is said and done, the headline is never "investors flee the dollar".

What happened to all the efforts to peg oil to the Euro?

yitbos