For all the concern over the US$1.6 trillion United States (U.S.) budget deficit and record debt load, the dollar is as valuable now as 35 years ago.
Measured against a basket of currencies from the Group of 10 nations proportioned by how they trade against each other, the greenback is up about 3 percent since 1975, according to Bloomberg Correlation-Weighted Currency Indexes. That was four years after the Bretton Woods agreement set up in 1944 to link currencies to the price of gold collapsed. The United Kingdom (UK) pound has dropped 34 percent and the Canadian dollar has fallen 6 percent.
The U.S. dollar gained 6 percent since November after losing 12 percent in the first 11 months of 2009 as measured by the Bloomberg index. Barclays Capital and Morgan Stanley say the U.S. will grow faster than the rest of the developed world this year and 2011. At the same time, Europe faces worsening finances in Greece, Spain and Portugal, Japan's economy is struggling and concerns about valuations in emerging markets are increasing.
“To quote Mark Twain, the reports of the dollar's demise have been greatly exaggerated,” said Win Thin, a senior currency strategist in New York at Brown Brothers Harriman & Co., which manages about US$40 billion in assets.
Nowhere is that more evident than in the market for U.S. Treasuries. The amount of America's government debt held by investors outside the U.S. rose 17 percent to US$3.6 trillion in 2009 through November, according to the Treasury Department.
Purchases may continue to rise as investors seek refuge from growing sovereign credit risk in the euro area. The dollar “will benefit from relative liquidity of the U.S. Treasury markets,” Barclays Capital currency strategists led by David Woo in London said in a Feb. 5 report.
Barclays Capital economists said in a report the same day that U.S. gross domestic product may grow 3.6 percent this year, versus 2.5 percent for the developed world, and 3.1 percent in 2011, compared with 2.6 percent elsewhere. Japan's GDP may expand 1.9 percent this year, and the euro zone 1.3 percent, they say.
A day earlier, strategists at New York-based Morgan Stanley boosted their dollar forecast, saying it will strengthen to US$1.24 per euro by year-end from its previous estimate of US$1.32. It closed at US$1.3678 last week. The firm sees the U.S. currency gaining to 109 yen from 89.25 last week, and rallying to US$1.49 to the pound from US$1.5641.
Investors and traders predicted last year the dollar would lose its position as the world's reserve currency, which means it's the first place central banks look to park their cash.
“With all the concerns about the problems with the U.S. financial system last year, the banking sector in the euro zone looked a bit more stable,” said Robert Sinche, chief strategist at Lily Pond Capital Management LLC in New York. “That created a sense of the euro as an alternative to the dollar.”
Central banks that disclose breakdowns of their reserves bought a record US$60 billion worth of euros in 2009's second quarter, more than half of their new cash in the period, based on International Monetary Fund data adjusted for exchange-rate changes using methodology developed by Barclays Capital.
