What is underpinning current dollar strength is a shift in market focus toward some of the headwinds facing the global economic environment. That’s swinging the risk appetite pendulum back toward safety, which is positive for the dollar. Words: 692
In further edited excerpts from the original article* Bryan Rich (www.moneyandmarkets.com) goes on to say:
So what can keep this momentum going in the dollar? Answer: growing risks to the global economy. Let’s take a look at some of the specific catalysts that could fuel more demand for dollars:
Catalyst #1: Rising Prospects of a Sovereign Debt Crisis
First it was Dubai that stoked fear in the financial markets and then Greece. Debt problems in a global crisis have the ability to be contagious and that can destroy investor confidence in the capital markets of such countries, and in the global economy and when confidence wanes, capital flees. That’s a recipe for falling dominoes. First Dubai, then Greece, then ????
Catalyst #2: Problems for the Euro
The recent downgrade in Greece turns the market focus back to the problems that exist in the Eurozone, and that’s putting downward pressure on the euro … which means upward pressure on the dollar.
The European Union’s growth and stability pact limits all member countries to a budget deficit of 3 percent of GDP but Greece is running a budget deficit of 12.7 percent of GDP, over four times the limit. In fact, on average, the 16 member states of the single currency are running a budget deficit more than twice the 3 percent limit! So the uneven performance in Europe will likely call into question the viability of the euro currency again.
Another bout of speculation of a break-up of the euro is hugely dollar positive.
Catalyst #3: Growing Uncertainty Surrounding Economic Recovery
Now that sovereign debt problems are surfacing, investors are getting concerned about the sustainability of this recovery. After all, the unprecedented global fiscal and monetary response was an experiment. The outcome is unknown and the underlying problems related to the crisis still exist: bad debt, reduced wealth and tight credit to name a few.
Moreover, when you answer a liquidity crisis with more liquidity, you’re bound to create more bubbles. While ground zero for the credit crisis was the U.S. housing market, new bubbles in real estate are developing in the areas that were relative outperformers in the downturn (such as China, India and Canada).
Catalyst #4: Protectionism
We’ve already seen evidence of restrictions on global trade and capital flows. Considering protectionism was a key accomplice in fueling the Great Depression, this activity represents a major threat to global economic recovery.
After the lessons from the Great Depression, the leaders from the top 20 countries of the world vowed to avoid protectionist activity but actions from the G-20 countries are speaking louder than words. New trade restrictions have been erected by most of them since the pledge was made. Trade restrictions could derail global economic recovery.
Perhaps the biggest factor in the protectionism threat is China’s currency policy. the Chinese have remained steadfast on keeping their currency weak. As this issue with China’s currency gains in intensity, expect protectionist acts to rise in retaliation and expect collateral economic and political damage.
If sovereign debt problems and the prospects of a double dip grow, you can expect investors to pull in the reins on risk and this time, they might not be as eager to turn the risk appetite switch back on which could give the buck a strong lift … a lift that might last longer and rise further than many expect.
*http://www.moneyandmarkets.com/what-could-lift-the-dollar-2-36841 (Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil.)
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