Is the dollar a safe haven?

1st June 2012

Charles Hugh Smith on Zerohedge has argued that there is sound rationale behind the recent strength of the dollar. The dollar itself looks attractive and US assets look attractive, creating a virtuous circle. He believes that this may eventually see the US and the dollar 'decouple' from the rest of the world.

"Despite a central bank (The Federal Reserve) with an avowed goal of weakening the nation's currency (the U.S. dollar), the USD has been in an long-term uptrend for a year-a trend I have noted many times here, starting in April 2011.

"That means a bet in the U.S. bond or stock market is a double bet, as these markets are denominated in U.S. dollars. Even if they go nowhere, the capital invested in them will gain purchasing power as the dollar strengthens. All this suggests a "decoupling" of the U.S. bond and stock markets from the rest of the globe's markets."

These views are echoed elsewhere: "US dollar rates have continued to strengthen and I personally feel are likely to continue in this fashion as global economic uncertainty continues to rise."

However, Hugh Smith's views are directly contradicted by John Aziz of Azizonomics, also on Zerohedge : "Smith is going along with one of the most conventional pieces of conventional wisdom: that in risky and troubled times investors will seek out the dollar as a haven. That's what happened in 2008. That's what is happening now as rates on treasuries sink to all-time-lows. And that's what has happened throughout the era of petrodollar hegemony…The era of petrodollar hegemony is slowly dying, and the assumptions and conventions of that era are dying with it. For now, the shadow of that old world is still flailing on like Wile E. Coyote, hovering in midair."

He argues that the fortunes of the US are inextricably linked with those of China and the Eurozone. In the event that one or both slides into crisis, the Federal Reserve has already indicated its willingness to continue to print money. We have written previously on Mindful Money that Bernanke is comfortable with the prospect of devaluation. Zerohedge goes one step further, suggesting that the resulting currency wars will lead to unprecedented political tensions between countries, but even a milder scenario might see the dollar depreciate.  

Zerohedge is not alone in believing that the dollar is at risk. Veteran investor Jim Rogers was quoted on Moneynews.TV saying that he was holding the dollar temporarily as a momentum trade, but investors needed to be careful: "People see it as a safe haven, but it is not a safe haven. But people think that, and so therefore I own the dollar…There is more turmoil coming out of Europe and other currency markets, so people, when they try to look for a place to flee, they flee to the dollar, so I fled to the dollar, too. The dollar is terribly flawed, terribly flawed over the next few years, so be very careful."

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