Monday, November 25, 2013

The rise of the US Dollar

Gary writes, "Internationally, money-especially today when it can be transferred anywhere in a split second-wants to be where the action is. That requires not only a powerful and large economy but also deep and broad markets in which to invest. Today, the U.S. Treasury market trumps all others in size and, in the eyes of investors…, in safety as witnessed by the mad rush into Treasury bonds in times of recent global trouble."

Similarly, Gary Shilling states, "American stock market capitalization is four times that of China, Japan or the U.K. and is over three times the Eurozone's…Almost 50% of Treasuries are held by foreigners but only 9.1% of Japan's government net debt is owned by non-Japanese. According to the IMF, 62% of the world's currency reserves are in dollars. The 24% in euros is down from 29% four years ago. Foreigners so love investing in the U.S. that at the end of 2012, it exceeded U.S. investment abroad by $4.4 trillion, up from $4 trillion a year earlier."

"Investors want to go where it's free and open; they don't like China. China periodically freezes their currency. They did that for example during the Great Recession. They had let it float up but then they froze it when they got worried. They're now letting it float a bit, but they turn it on, they turn it off. Other currencies are much less free to people moving out. They typically manipulate currencies in a lot of places. The Swiss, for example…froze their currency 1.2 to the Euro when everybody wanted to be in the Swiss Franc because they worried that a strong currency would kill their exports to the Eurozone, which is their major trading partner."

"Things can change over time but one statistic that I think is very important is global forex trading. Now, there's two sides to this so the numbers add up to 200%, not 100%, because for every sale there's a buy. But if you look at the trading, in 2001, the U.S. dollar accounted for 90% of all the daily trading in currencies. In 2013, it's down from 90% to 87%. But if you think of all that's happened in that time, the euro currency had come in, China has gotten stronger, etc. But it still has only declined 3 percentage points and it's way ahead of anything else. The second one today is the euro at 33% versus [the USD at] 87%, the yen 23%, sterling 12%-in other words, this is the currency that people transact."

"The sixth characteristic is credibility. And that's the only one where you can say there's been any questioning of the dollar. And it is true that last year that Standard & Poor's did downgrade the U.S. from triple AAA to AA+, but that hasn't really hurt. You might remember that when they did that, Treasuries actually rallied…and it has not changed the willingness of foreigners to put money into dollar denominated assets. So, the credibility issue is the only one that is not absolutely triple-A, but it hasn't had any decided effects so far."