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PrintMarch 7, 2011
The Rise of Dollar Risk
The dollar has long been seen as a place of safety whenever there are times of turmoil such as the present upheaval in the Middle East. Historically soaring oil prices and potential uncontrolled inflationary pressures worldwide have caused a flight to the dollar in order to offset risk.
This time, while the other traditional havens of the Swiss Franc and the Japanese Yen have benefitted, the one currency that has always been the overwhelming refuge of choice, the dollar, has suffered.
The reality of this situation is reflected in the financial markets where hedge funds and foreign exchange dealers are betting record amounts against the dollar. As the crisis in the Middle East has worsened, the lack of resolve by President Obama to tackle the US deficit and the effect of rising oil prices have combined to convince the traders to sell the dollar "short" (bet the currency will continue to decline).
The Financial Times reports that figures from the Chicago Mercantile Exchange, which are often used as a proxy for hedge fund activity, showed that short dollar positions surged from 200,564 contracts in the week ending February 22 to 281,088 on March 1. This represents an increase of $11.5 Billion to $39 Billion, the highest level on record. This is a phenomenal jump in one week considering it is the dollar that is being shorted.
Also in the mix is a realization by the traders that the Federal Reserve is likely to maintain its ultra loose monetary policy in the face of rising inflation while other central banks are raising their interest rates in order to combat inflationary pressure. There is a lack of credibility in the Federal Reserve throughout the investment community.
In recent weeks the US Dollar has hit an all time low against the Swiss Franc and the Canadian Dollar and is just shy of the all time low against the Japanese Yen. Even the Euro, still battered by debt crises in Greece, Ireland, Spain and Portugal, has risen to its highest level against the US Dollar since November 2010.
The markets, with their money, are telling the United States that while the Fed and the Obama administration are touting what they perceive to be a recovering economy, there is little or no confidence that this team has the right strategy in place for a sustained recovery and they are not at all serious about the US debt and deficit debacle the country finds itself in. Never in recent history has there been such a low level of confidence in the United States.
The Congressional Budget Office announced that the Federal Deficit for February hit an all time high for any single month in US history. The deficit was $223 Billion.
As recently as 2006 the deficit for the entire year was $248 Billion and in 2002 the deficit was $158 Billion (the year after 9/11). The estimate for the fiscal 2011 is nearly $1.6 Trillion.
