NEW YORK, June 13 (Reuters) - Global investors' sudden
allergy to risk is proving a boon for the U.S. currency, as
money managers sell stocks, commodities and emerging-market
assets and park the proceeds in dollars.
But this may be more a scramble for liquidity than a genuine
safe-haven bid, analysts said, pointing out that dark clouds
still lurk on the dollar's horizon. And, if the broad downtrend
that the dollar began earlier this year resumes, holders of U.S.
assets may face heavy losses.
Last week, the greenback put in its best performance against
a basket of major currencies in more than a year. On Tuesday, it
hit a fresh one-month high against the euro.
Yet, what at first blush looks like a vote of confidence may
have more to do with investor positioning.
"I wouldn't call this a flight to quality -- I'd call it a
flight to liquidity," said Shaun Osborne, chief currency
strategist at Scotia Capital in Toronto.
Indeed, analysts at Barclays Capital found the euro-dollar
exchange rate showed little correlation in the past six years to
a risk index that comprised several key risk meters.
The index included 52-week moving averages of the Chicago
Board of Trade's volatility index, a key gauge of U.S. stock
investors' fears, and the spread between yields on emerging
market and U.S. Treasury debt, which generally measures investor
appetite for riskier investments.
Michael Cheah, a portfolio manager at AIG SunAmerica Asset
Management in Jersey City, New Jersey, said markets in recent
weeks have witnessed the first leg of a two-part process.
"The first part is to unwind trades in emerging markets and
elsewhere, most of which were against the dollar," he said.
Currency analysts at Deutsche Bank said on Monday that their
latest market-positioning indicators showed short-dollar
positions -- bets on a further dollar slide -- were trimmed by a
third, while bets on the euro to rise were halved.
Even more revealing, J.P. Morgan analysts noted that long
positions on Mexican pesos went from being two times higher than
last year's average in April to 3.5 times lower by the end of
last week -- a clear sign investors are shunning risk.
SAFE HAVEN BY DEFAULT?
But once traders have bought back dollars, the question,
Cheah said, becomes "what to do next?"
For many, that may not include staying heavily exposed to
dollars for long, as "there are very evident risks out there for
the dollar," Osborne said.
Key among them is the unraveling of the happy confluence of
a steadily rising interest rate, tame inflation and solid
economic growth that buoyed the dollar in 2005.
While the Federal Reserve is still signaling rate hikes to
come, it seems now to be chasing inflation just as growth is
showing signs of cooling. Historically, that's been bad for the
dollar.
"Late-stage interest-rate hikes tend to hurt a currency, not
help it, because the economy turns over and people begin to
discount future Fed rate cuts," said David Gilmore, an economist
and partner at Foreign Exchange Analytics in Essex, Connecticut.
"That's where I think we'll end up."
The only saving grace for the greenback may be the lack of
safe-haven alternatives -- and that hardly amounts to a
resounding vote of confidence in the currency.
The most attractive safe-haven currencies tend to be from
countries running current-account surpluses. That, said Bernard
Connolly, global strategist at Banque AIG in London, rules out
the most liquid dollar alternative: the euro.
A mismatch of competitive and noncompetitive economies, the 12-country euro zone also includes retrograde governments which
run huge current-account deficits of their own.
The Swiss franc, the usual place to park money in times of
risk, is a better bet -- but a much smaller market.
"It may not be possible to find a safe-haven currency that's
big enough for everyone," Connolly said.
Another drag on the dollar is the U.S. current-account
deficit -- the broadest measure of trade and investment flows --
which has ballooned to 7 percent of gross domestic product.
The ideal scenario calls for a slow, gentle dollar slide
that gradually chips away at U.S. deficits, increases the U.S.
savings rate and makes American exports more competitive.
The dollar was oversold amid the recent "liquidity flood"
that supported emerging markets, so further unwinding of those
trades may buoy the greenback for a while, said T.J. Marta,
senior currency strategist at RBC Capital Markets in New York.
But longer term, "reserve banks will eventually diversify
holdings, and that's going to take the dollar lower," he said.
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