Dollar Viewed as Safe Haven Currency

In late 2008 when the global recession hit the dollar initially rose as traders and investors sold off risky assets for the safe haven of the US dollar and the Japanese yen. The Federal Reserve took various emergency measures to address the financial meltdown and credit crunch. Measures taken by the Fed included reducing interest rates to record lows and introducing quantitative easing.

Trading on Risk

In 2009 when some economies displayed ‘green shoots’ of recovery investors dumped the dollar in favor of higher yielding assets. Throughout the year the dollar traded mainly on risk instead of fundamentals. When the news was bad the dollar gained and when the news was good investors sought out higher yielding currencies such as the Aussie and Kiwi dollars. Low US rates enabled investors and traders to use the dollar to fund ‘carry trades’ where investors use currencies with low rates to fund the purchase of higher yielding assets.  Neil Mackinnon of VTB Capital stated, “This year, particularly since the Federal Reserve adopted ‘quantitative easing’ as a formal policy and cut interest rates to virtually zero, the U.S. dollar effectively became for investors and traders a funding currency. So investors and traders would borrow in dollars and use those funds to invest in higher-yielding investments like equity markets, like commodities, emerging markets, high- yielding currencies.”

Year End Dollar Rally

The dollar rallied broadly after the November non farm payrolls report that showed that US employers cut fewer jobs. Most non farm payrolls throughout the recession showed job cuts in the hundreds of thousands and the November report showed that only 11,000 jobs were lost. Many analysts thought initially that the low figure was a misprint. Since then figures from the US indicate that recovery is under way. The dollar gained against the euro which had been pressured by EU banking problems and the credit downgrades of several EU nations.

Fed Rate Hike Key Question

When the Federal Reserve will raise rates continues to be a key question in currency markets. Many currency experts believe that recent positive US economic data will prompt the Fed to raise rates early in 2010. Investors remain concerned about mounting US debt and massive deficits caused by ongoing wars in Iraq and Afghanistan and various stimulus programs. The US deficit is now at a record $1.4 trillion dollars for the 2009 fiscal year. 2010 should be an interesting year for the dollar!

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