Felix Salmon noted this weekend that the US dollar didn’t see much of a bounce from the latest turmoil, which is, perhaps, an ominous canary in the coalmine.
In a new note, Morgan Stanley is observing the same thing:
Is this the best the USD can do in the face of risk retrenchment? While the USD responded very strongly to signs of financial market frictions and deleveraging among market participants in major economies during the summer of 2008 through March 2009, the USD has not seen a uniform
trend following the news of a possible default by Dubai World, and rising concerns about sovereign risk more broadly.
Over the past week, the USD is stronger against some higher- yielding currencies such as AUD and NZD, but it is weaker against JPY and EUR. The mixed performance of the USD
suggests that while investors may have scaled back risk somewhat following the recent developments, there is not yet a strong global safe-haven demand for US Treasuries; which is what usually propels the USD higher during periods of global risk aversion. Investors seem to be interpreting recent
events as discrete and idiosyncratic in nature, a view that we share. As a result, we do not anticipate a broad-based USD rally in the wake of this hiccup in risk appetite. Instead, it is notable that JPY, CHF and even EUR, are benefitting relatively more than the USD.
Morgan appears to be hedging its bets a little bit. Is the lack of USD appreciation the result of the fact that it’s fading as the safe-haven of choice, or the fact that Dubai is no big deal.
Given the relative calm in the market over the past several days, it would seem to be the latter.