Who's The Big Winner Here? The Dollar

After suffering for so long as the peso’s punchline, it looks like the dollar is finally getting somewhere. But maybe the rise isn’t such a good thing.

IHT: The great market upheaval of 2008 has stripped 45 per cent from the value of global equities, led bank lending to nearly dry up and caused commodity prices to crash from stratospheric heights. And now, paradoxically, it is helping to lift the long-suffering dollar.

The U.S. currency has been on rampage of late, gaining 15.5 per cent against a basket of currencies since Aug. 1. As stock markets sank again Wednesday, the dollar rose against its European counterparts, with the British pound falling to $1.6242, a five-year low, and the euro falling to $1.2843, near a two-year low. Only the yen, on a tear of its own, has been stronger.

World leaders, who will meet Nov. 15 in Washington for a crisis summit meeting, could be forgiven for seeing some irony in the fact that the currency of the country where the global crisis began should be seen as a  haven.

Just six months ago, on April 22, the euro rose to over $1.60 for the first time, while the pound was trading at $2.

But after it became evident in August that the combination of tight credit and commodity price shock was weighing on the real economy, the dollar suddenly took off, said Kathleen Stephansen, head of global economic research in New York for Credit Suisse.

But we shouldn’t be too thrilled about that. Here’s why:

The dollar’s rebound “is a sign of real panic and risk aversion,” she said, as investors liquidate investments bought at a time when interest rates heavily favoured European assets. Institutional investors, faced with losses suffered on U.S. investments, are also liquidating overseas assets to meet margin calls, she said. That adds to the dollar’s strength when the foreign currencies are sold for dollars.



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