Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Alternative World Reserve Currencies to the U.S. Dollar Part 2

Currencies / Fiat Currency Nov 29, 2009 - 07:59 AM GMT

By: Bryan_Rich

Currencies

Best Financial Markets Analysis ArticleIn last week’s Money and Markets column, I analyzed the three major liquid currencies as prospective alternatives to the U.S. dollar: The Japanese yen, the British pound and the euro. Fundamentally, they all fell short.

As I explained then, these three don’t offer any appeal over the dollar. That’s because the currency market is a beauty contest where the least ugly wins. And not only is the dollar the least ugly, but it offers refuge when fear and uncertainty grip the markets.


So What about Other Currencies?

Other world currencies may not offer the liquidity to emerge as a primary reserve currency. Nonetheless, I’m frequently asked how they stack up against the dollar. Do they offer opportunities to preserve the purchasing power of your wealth … or at least make for a good trade?

This conditional statement I wrote last week applies to these other currencies as well:

“If the Fed and other central banks around the world fail to remove the emergency stimulus before those measures translate into inflation, then ALL currencies will fall in value relative to hard, tangible assets like gold, real estate and other commodities … even financial assets like stocks and bonds. That’s global inflation.”

That determination will likely be made years down the road. For now deflation remains the problem until global demand and credit growth bounce back, which I think will be a longer, bumpier road than most think.

But, like last week, I don’t want to debate inflation or deflation today, I want to take a look at some other potential alternatives to holding U.S. dollars in a world where dollar sentiment is profoundly negative.

So let’s take a look at …

Dollar Alternative #4 — The Swiss Franc …

The  safety and secrecy of the Swiss banking system has come into question.
The safety and secrecy of the Swiss banking system has come into question.

The historical safe-haven feature of holding the currency of the neutral Swiss should be an extra benefit these days. But the global nature of the financial crisis deteriorated the safe-haven quality of Swiss francs. And its preferred status has transferred to the U.S. dollar.

Switzerland’s banking system was (and remains) highly exposed to the financial crisis. And, even worse, the global crack-down on tax havens puts the Swiss private banking model in jeopardy.

In addition, the Swiss are printing money at a faster clip than the U.S. and have been intervening in the currency markets to weaken the franc and to attempt to curtail deflationary forces.

The Swiss economy is expected to underperform the U.S. in 2010 and 2011. And interest rates in Switzerland are as low as they are in the U.S. and are projected to follow U.S. rates higher in the coming years, but at a slower rate. Again, the advantage goes to the dollar.

Dollar Alternatives #5, #6 and #7 — Commodity Dollars …

Canada’s banking system has held up better than its G-7 counterparts. And the Canadian economy has tracked the U.S. economy closely through the recession. Although Canada has a strong performance linkage to the price of oil, the economy has an even stronger link to the general health of the U.S. economy.

That’s why the Canadian dollar has tracked the U.S. stock market in lock-step since the crisis broke out. And I expect that trend to continue. So, if you think our stock market will go higher from here, the Canadian dollar offers a dollar alternative.

The Australia dollar has leaped 60 percent  in recent months.
The Australia dollar has leaped 60 percent in recent months.

As for the other two commodity-centric currencies … the Australian and New Zealand dollars … there’s only one story worth telling here. It’s Australia. Australia is the bright spot in global currencies. Its economy weathered the global recession the best, and its central bank was the first in the world to raise interest rates … twice.

Australia also happens to be in the sweet spot to take advantage of growth in China and higher commodity prices. So Australia offers an alternative to the dollar, but only after it pulls back from its aggressive 60 percent surge of recent months. And only with an appreciation for the risks … as described below.

Dollar Alternatives #8, #9, #10 and #11 — The BRIC currencies …

Brazil, Russia, India and China are still emerging economies. And these developing economies tend to come with imbalances and shortcomings that leave them exposed to excessive volatility. Therefore, they should be off-limits as passive, unmonitored currency investments.

In short, the currencies of these countries are high-beta. So when the risk environment is good, these currencies will do better than major currencies. When it’s not, look out.

Just eight months ago Russia was  intervening to support the value of the ruble.
Just eight months ago Russia was intervening to support the value of the ruble.

For example, just last year Russia spent over a third of its $600 billion in currency reserves trying to defend the value of the plummeting ruble as global capital fled Russia in search for safety. And now, the Russians are talking about capital controls, like Brazil has done, to restrict speculative flows into their financial markets.

What a difference eight months makes. And that’s indicative of the volatile nature of these emerging market countries. And with protectionism picking up globally, the uncertainty surrounding these currencies is even greater.

China’s a different ball game. The managed currency policy in China, which I most recently wrote about in my November 14 column, prohibits the Chinese currency from playing a role globally, anytime soon.

Can China’s currency appreciate materially? Yes. Will it? Not likely. The Chinese will continue to do what’s in their best interest. And keeping the yuan artificially cheap creates plenty of advantages for the Chinese — and disadvantages for the rest of the world.

You Must Respect Risk …

We are in highly uncertain times, and, in my opinion, the markets are far too complacent in assessing risk. Rising stock prices have a way of making people feel good.

But keep this in mind, when considering alternatives to the dollar for the sole purpose of preserving purchasing power of your wealth: There is always the risk of a decline in these currencies, even when a fundamental indicator may seem positive.

Why? Because all of the currencies I’ve mentioned today are intimately tied to the performance of the global economy. And with that linkage, comes risk.

In fact, just last year:

  • The Australian dollar dropped 38 percent in three months,
  • The Canadian dollar fell 26 percent in one month,
  • And the Brazilian real lost 59 percent of its value against the U.S. dollar in a little more than a month.

And if you’re overly concerned about the recent weakness of the dollar, you need to put things into perspective …

The dollar still remains seven percent stronger than it was last year against the euro, 19 percent stronger against the pound and in better position than nine out of its top ten trading partners.

In this investment climate, investor perception trumps fundamentals. When investors feel confident, we see strong surges in global currencies. But when fear sets in, it’s just the opposite … investors look to the U.S. dollar.

Regards,

Bryan

This investment news is brought to you by Money and Markets . 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. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules