U.S. Dollar Rises On Continued Flow Of 'Safe Haven' Moneyby John M. Mason
- The recent rise in the value of the US dollar appears to be connected with the flow of "risk averse" monies seeking a "safe haven" investment.
- This is not a new factor for US markets as the country has received a lot of these funds over the past five years or so, due to difficulties elsewhere.
- Furthermore, an important fact is that Jay Powell and the Federal Reserve System have acted in a way that has built up confidence in the country as a "safe haven."
The US Dollar continues to strengthen against the Euro and against other currencies throughout the world.
The reason is that the United States continues to act as a "safe haven" for "risk averse" monies.
Friday morning the dollar is flirting with a price of $1.08 against the euro and the US Dollar Index (DXY) has been flirting with the 99.15 level.
These numbers are at the very top of the forecast I have been supporting for the past six months or so, a $1.08 price for the euro and an index level of 100.00.
The United States has been a beneficiary of risk averse monies since the latter part of 2014, a time that the eurozone was experiencing some economic and financial distress.
One can see that the strong point for the euro came in March 2014, as the cost of one euro rose beyond $1.38. As risk averse monies began to flow after this month, the cost of one euro dropped to just above $1.08.
During this time, funds flowed into the United States from other countries as well, and the value of the dollar rose until just after the election of Donald Trump as president of the United States.
The value of the dollar continued to rise after the election of Mr. Trump, but in December 2016, the president-elect began talking about moving to weaken the dollar so as to generate more exports and support economic growth.
Some of the safe haven funds began to leave the United States.
In December 2016, one euro cost just a little bit above $1.05.
The value of the dollar weakened through August 2017 as one euro rose to a value of around $1.18.
But, things changed after this. The state of the US economy seemed to be strong relative to other major countries in the world and this made the US dollar look attractive to many traders.
Also, Jerome Powell assumed the position of Chairman of the Board of Governors of the Federal Reserve System in early February 2018 and he immediately began to signal that the Federal Reserve was going to support the relative strength of the US economy and would not use the Federal Reserve to support a weaker US dollar.
Traders took Mr. Powell "at his word" and the recent weakness in the US dollar ended. The interesting thing here is that the cost of one euro peaked at $1.2340 in early February 2018 coinciding with Mr. Powell's appointment as Fed chair.
The cost of the euro has trended downward ever since as it became apparent that the risk averse monies felt safe with choice of Mr. Powell and the relative strength of the US economy.
I spend time reviewing these events because these risk averse funds are still playing a major role in the rising value of the US dollar.
Today, Matthew and Anna Gross write in the Financial Times,
"The euro has fallen to its weakest level in more than two-and-a-half years, as investors balked at poor eurozone economic data and moved into the dollar as a haven asset while the coronavirus crisis deepens."
In addition, "Worries over the spread of coronavirus have boosted the dollar, a haven for investors during uncertainty over the global outlook. The dollar index, which measures the greenback against a group of other currencies, was up 0.2 per cent in the same period - bringing its gains over the past month to 1.8 per cent."
It could also be mentioned that the political situation in Europe has not helped confidence in the euro as Angela Merkel has seen her political legacy weaken as the economic situation in Germany, as well as her efforts to leave Germany with a political heir, have not fared well.
Furthermore, President Macron in France is having political difficulties, while the situation in Italy is even more chaotic than usual. The three largest economies in Europe are all having problems.
Given these factors, it is highly likely that these risk averse funds will continue to come to the United States and will continue to give foundation to the strength of the US dollar.
One other thing I would like to mention. I believe that Fed Chair Powell has a good grasp on what he is doing at the Federal Reserve.
Of particular interest to me is the scope of Mr. Powell's vision right now. This past week he has spoken out at least twice about the concern the Fed has over the spread of the China virus.
He has also expressed the fact that the Fed is keeping a close watch on what is going on in Europe and the continued weakness in European economies.
More than ever, the Federal Reserve is acting like a central bank for the world. And, realistically, the Fed has to do this. Especially since the efforts made by the Fed during the Great Recession and the economic recovery following this episode, it has become obvious that the world is awash with dollar liquidity. The Federal Reserve cannot avoid what is going on in the rest of the world.
I believe that this is another reason why the risk averse funds are as secure as they are with what is going on in the United States. The investors behind these funds have confidence that the Federal Reserve will act in a way that is consistent with supporting a strong, vibrant global community. And, these investors feel safe in putting their monies in United States assets.
Right now I am comfortable with the value of the dollar where it is, around $1.08.
As I have written in earlier posts, I believe that the global traders are comfortable with the dollar being in the $1.08 to $1.10 range. I am not ready to go any lower at this time, but I think that this level is maintainable.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.