The dollar reasserted itself as the global reserve currency of choice in 2011, despite concerns about US debt.Worries over borrowing in recent years have seen the dollar weakening, despite successive Treasury Secretaries repeating their mantra that the country has a “strong dollar policy”.
However, as a lack of safe haven alternatives and a liquidation of risky assets unfolded, the US currency rallied sharply in the last few months of the year. The dollar index, which tracks the greenback against a basket of currencies, jumped by about 9% from its lows earlier in the year.
Worries over euro zone sovereign debt prompted the dollar gains, as did the removal of the Swiss franc as an alternative safe haven currency in September. The Swiss central bank intervened to dampen the currency’s appreciation as the exchange rate hit an export-damaging level.
The Swiss National Bank (SNB) set a minimum exchange rate of 1.20 francs to the euro, arguing the current value of the franc was a threat to the economy. To achieve this, the bank said it would buy foreign currency in “unlimited” quantities.In December, speculation mounted that the Swiss would move to weaken its currency further,as data showed that orders at Swiss industrial companies had fallen by about 5%. However, the SNB did not make such a move. It does, however, remain a possibility
A couple of weeks ago, UBS said that the SNB’s intervention meant that the Swiss franc could no longer be regarded as a safe haven. “As we enter 2012, neither gold nor the Swiss franc retains a safe haven status,” Alexander Friedman,Zurich-based chief investment officer at UBS Wealth Management, said. At the start of 2011 UBS said investors considered gold, the franc,the US dollar, US Treasuries and Japanese government bonds as safe havens.Gold, which many believe is an alternative currency, spike to all time highs during August, hitting $1,923 an ounce, but retrenched sharply over the next few months.
The recent flight to safety means that Japanese yen is likely to be the best performing currency of the year in 2011 — for a second year in a row. The Japanese central bank was also forced to intervene this year, selling yen to protect its exporters.At the end of October, the bank sold $100 billion worth of yen. However, dollar strength at the end of the year meant that the Japanese currency weakened against the dollar.
As we enter 2012, London strategists expect the dollar and yen to continue to strengthen.US pressure on China to drop its policy that caps the strength of the yuan continued. The policy makes the country’s exports more competitive over the world, but makes imports more expensive – a fact which has accelerated the shift of manufacturing jobs to the east from the west. The country dropped the yuan’s fixed peg against the dollar in 2010 but still intervenes to control its value.Other countries that have had to manage soaring currencies have been the commodity producing nations.
Canada, Australia, Russia, Brazil and South Africa have benefited from strong export demand for natural resources. However, this has led to rising costs for major international companies in these countries – with miners being especially hard hit by the money market moves.
The Australian dollar hit another all-time high against the pound in July, but the Canadian dollar did not match its record high set in 2012 — but it came close. The pound was weak against the euro, as were all major crosses,in the first half of the year, but the single currency has been weakening against all major crosses as the Sovereign debt crisis unfolds. The pound also weakened against the dollar in the second half
Dollar reasserts its dominance on flight to safety Leave a comment