Just when some pundits were willing to give the battered U.S. dollar up for dead, investors moved back into the greenback's corner Friday as jitters about Dubai's debt problems sent global stock markets reeling.
The U.S. dollar rallied against the euro and a basket of other currencies after worried investors snapped up the traditional safe haven reserve currencies in Friday’s session.
Concern over a second round of financial crises in world markets mounted after Dubai World’s liquidity was questioned. The United Arab Emirates investment company, responsible for many lavish construction projects around the capital, announced it would postpone debt repayments totaling nearly $60 billion US until May.
Over the past few quarters investors have largely forgotten one key attribute of the U.S. dollar, says Stewart Hall, a currency and fixed-income strategist with HSBC Securities. Uncertainty in the marketplace swings the balance in favour of the liquidity and security offered by the greenback, Hall told QMI in a telephone interview Friday.
"By the very numbers it's most certainly still the world's reserve currency. It still occupies the largest space in most central bank reserves," Hall said. The total share of global reserves in U.S. funds stands at about 60%.
And National Bank's Chief Economist Stephane Marion disagrees with some bold predictions that the greenback is on its way out.
"I would be extremely surprised if (reserves in U.S. dollars) were to fall below 50% over the next 5-6 years," Marion recently told QMI.
But as long as Americans keep spending their way back to economic recovery through stimulus measures, the U.S. dollar, some would argue, can only fall lower. Near-zero federal interest rates have also encouraged the carry trade whereby market players borrow U.S. dollars to invest the funds in risky but higher-yielding stocks and commodities.
And the international trend toward diversification is also suppressing the U.S. dollar. Just this week, Russia's central bank announced it would invest some of its $434 billion US reserves in Canadian dollars to reduce its dependence on the greenback. The news sent the loonie skyward.
Add to the mix the ever-climbing price of gold, and the U.S. dollar looks to have only one way to go from here -- south, way south.
Still, a weak U.S. dollar isn't synonymous with a shift in global currencies. While there might be some erosion under the weight of the sluggish U.S. and global economies, experts agree it will remain the reserve currency for the foreseeable future.
If there was any doubt in the U.S. dollar's ability to remain a reserve currency you would see more pressure on the U.S. bond market, Marion said.
"You are not seeing a disorderly decline in U.S. currency," Marion said adding, "I don't see people giving up on the U.S. dollar as a reserve currency."
And it's still difficult to see a viable alternative to the greenback or yen.
