February 15, 2012
By Darryl Robert Schoon
Inverse Lin-omena, the inverse of the Jeremy Lin phenomena where the unknown and previously discounted suddenly rise to prominence; here, the powerful and previously secure suddenly fall.
Today, central bankers, the mandarins of capitalism, are in disarray. Their attempts to contain capitalism’s current crisis increasingly resemble the tactics of a defeated army in retreat. Like Napoleon and Hitler’s respective “Moscow moments”, the 21st century economic crisis has brought to an end the bankers’ spectacular 300 year run at the table of power and wealth.
The indebting of others as a means of accumulating wealth ends when the indebted can no longer pay what they owe. The arcane and esoteric scribblings of second generation University of Chicago trained economists cannot cover up this basic fact, i.e. that the indebted are broke; and soon, their creditors will be as well.
The bankers’ franchise of credit and debt built on a leveraged foundation of paper money fractionally backed by gold allowed the West to accumulate geopolitical power and wealth on a vast scale. That era is now over.
It ended when the gold convertibility of the US dollar was terminated in 1971 when the cost of maintaining a global military presence outstripped the ability of the US to pay in gold what it owed on paper.
It was as if someone removed a pin from the axle of international commerce when the US dollar was no longer convertible to gold. Previously, the US dollar was linked to gold, and other currencies were linked to the dollar. Everything was stable. It is no longer so. Once the pin connecting gold and paper money was removed, everything changed. The axle of international commerce began to vibrate and lately it’s been getting much worse. The fear is that the wheels are now about to come off. – Section 1, topic 3, How to Survive the Crisis and Prosper in the Process, Schoon, 2007
Today’s fragile state of the euro, a fiat currency created in a failed European attempt to compete with and/or replace an increasingly unstable US dollar, is but another indicator that the wheels are now about to come off.
December 1, 2011
By Silver Doctors
Bob Chapman of the International Forecaster states that sources are indicating that the Fed is preparing to roll out a new dollar (NOT the Amero) as The Fed expects the US Dollar will no longer be the reserve currency in another 18 months.
Banks are being told , and I get this right from the people who are at the top of the banking profession not with major banks but with top middle sized sized banks and they go to the FED meetings and they tell me what goes on and they told me that the FED told the Banks to clear safe secure storage because we are getting ready to print a new currency , it’s not the Amero it’s a dollar probably a different one of what you have already , it’s underway , it may not be in the printing stage yet but the plans are there ….because the FED is expecting as is the treasury the the US Dollar is not going to be the reserve currency of the world in about a year and a half may be less.
November 15, 2011
The Daily Reckoning
By Dan Amoss
The world’s “faith-based” monetary system is breaking down before our eyes. Don’t be caught off guard.
Last week’s euphoria over the Euro bailout turned around sharply this week on news that the political situation in Greece is worsening. That’s been the pattern for months.
The grim reality is that “rescue plans” can’t fix what’s broken. The Western nations are suffocating under mountains of debt…and there are only two known “cures”: default or inflation.
The default option is quick, direct and painful…but very effective. The inflation option is slow, indirect and somewhat less painful…but very ineffective. Inflation is more an anesthetic than a genuine cure, which is the reason why politicians prefer it to an outright default.
So it should be little surprise that the politicians of the euro zone have been signaling very clearly that they intend to “inflate away” the Greek-cum-Italy crisis. They will embark on a European version of Ben Bernanke’s quantitative easing tactic — i.e. print money to buy the bonds of troubled PIIGS governments.
Since the default option in not on the table, the PIIGS crisis won’t be close to resolved until we see the ECB overtly or covertly monetize a lot more PIIGS debt. The math doesn’t work without heavily diluting the wealth of eurozone savers via inflation.
We will see much more debt monetization; this week’s interest rate cut from the ECB was just the start of monetary easing in Europe. On this subject, I dug from my files a piece I wrote for Strategic Investment in March 2007.
Here is an excerpt from this essay, which has become even more relevant today than when it first appeared three and a half years ago:
I think more clearly on a train. The rumbling helps focus my mind… Passengers are very much a part of their landscape, yet detached — a perfect occasion to sit back and think about the world that flies past the window.
Here in America, the world that flies past the window is one in which capitalism has become a wealth-transfer process instead of a wealth-creation process. Without genuine wealth-creation, however, the US dollar’s value will become increasingly suspect.
A few weeks ago, as I was rolling up the tracks from Baltimore to New York, my gaze landed on an oil refinery. A little while later, I spotted a casino. Then I started to think about these two very different forms of capitalism — one that relies on an intensive investment of physical capital and one that relies almost entirely on paper money.
Is one of these forms of capitalism inherently better than the other? Does one of them produce a more enduring prosperity?
Yes, to both questions.
Passing by Sunoco’s Marcus Hook Refinery, you can’t help but admire this feat of engineering. Situated on the Delaware/Pennsylvania border, this 800-acre campus covered in miles of steel pipe has the capacity to crack 175,000 barrels of crude oil into refined products in a single day.
Harrah’s Chester Casino & Racetrack does not produce gasoline. It does not produce anything…except a transfer of wealth. It stands in stark contrast to the refinery. The only similarity between the two is that you wouldn’t want either in your backyard.
November 1, 2011
Gold and Silver Daily
By John Embry
Well, it was a pretty quiet opening in the gold market in the Far East on their Monday morning. But all that changed the moment that Japan intervened in the currency markets to drive down the value of the yen.
Of course the U.S. dollar skyrocketed…and gold ‘fell’. Once the trading stops were tripped, it fed on itself…and in about two hours, the gold price was down about two percent. A smallish recovery got sold off shortly before 1:00 p.m. Hong Kong time…with the absolute low coming in a spike down shortly after London opened for trading at 8:00 a.m. BST.
From there the gold price made a gradual recovery until Comex trading began at 8:20 a.m. Eastern time…and then traded sideways until 3:00 p.m. in the New York Access Market. Then gold got sold off about ten bucks going into the close of electronic trading at 5:15 p.m. Eastern.
The gold price finished the day at $1,715.10 spot…down $28.30 on the day. Net volume was around 115,000 contracts, with a bit more than half of that volume having been traded by the time that London opened.
Silver, as usual, really got it in the neck…and in about two hours was down over three percent to around $34.25 spot. From that point, every time it made an attempt to break through the $34.50 spot, there was a willing seller at the ready to make sure that didn’t happen.
Silver closed at $34.20 spot…down $1.05 on the day. Surprisingly, silver’s volume was very light…only around 23,000 contracts net…and the other surprising thing was that only 6,000 of those contracts had traded by the London open…about 25% of the total net volume. In gold, more than 50% of Monday’s volume had traded by that time.
I would guess that there weren’t that many longs to liquidate at these prices, as virtually all the tech funds are still twiddling their thumbs waiting for silver to break through it’s 50-day moving average, which it is now further away than ever. And it’s always possible that JPMorgan was aggressively covering it’s 3,000 contract short position that it put on during the prior week’s trading. More on that further down.
September 14, 2011
By: Chris Arsenault
China is shifting some of its massive foreign holdings into gold and away from the US dollar, undermining the dollar’s role as the world’s reserve currency, according to a recently released WikiLeaks cable.
“They [the US and Europe] intend to weaken gold’s function as an international reserve currency. They don’t want to see other countries turning to gold reserves instead of the US dollar or Euro,” stated the 2009 cable, quoting Chinese Radio International. “China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold.”
The cable is titled “China increases its gold reserves in order to kill two birds with one stone”. Taken together with recent policy announcements from Chinese banking officials, it may signal moves by China to eventually replace the US dollar as the world’s reserve currency.
Last week, European business officials announced that China plans to make its currency, the yuan, fully convertible for trading on international markets by 2015. Zhou Xiaochuan, governor of China’s central bank, said the offshore market for the yuan is “developing faster than we had imagined” but there is no definitive timetable for making the currency fully convertible. Presently, the yuan cannot be easily converted into other currencies, because of government restrictions.
China’s gold holdings are small compared to other major economies. It has 1,054 tonnes, the sixth-largest reserves in the world, according to data from the World Gold Council.
Buying gold and allowing the yuan to be traded freely would weaken the US dollar’s dominance as the international reserve currency. The move would have major implications, making it more expensive for the US government to borrow money and to run perpetual trade and budget deficits.
“The US is used to having the position of having the key reserve currency, but others are eager to replace it,” said Josh Aizenman, a professor of economics at the University of California and president of the International Economics and Finance Society.
As a reserve currency, the US dollar is the default for international transactions. If, for example, a South Korean company wants to buy wine from Chile, chances are they will carry out the transaction in dollars. Both companies must then purchase dollars to conduct their business, leading to greater demand. The value of global commodities, such as oil, is also generally demarcated in US dollars.
Being a reserve currency allows the US to borrow at low interest rates, as central banks around the world are eager to buy US government debt. “Any country that can finance its expenditures by printing money or selling bonds is essentially getting a free lunch,” Aizenman told Al Jazeera.
With China’s apparent change of heart, that “free lunch” now might come with a hefty tab. Given the massive US trade deficit, average Americans might be sent to the restaurant’s kitchen to wash dishes if the dollar loses its status as the world’s reserve currency.
“China, until recently, was focusing on buying the US dollar through bonds,” Aizeman said. Since the economic crisis, the US dollar has dropped compared to other major currencies, particularly the Swiss franc, Canadian dollar and Brazilian real. This leaves China in a bind, analysts said.
In March 2011, China held $3.04tn US dollars in reserves, Xinhua news agency reported. It is the largest holder of US treasuries, or government debt, with $1.166tn as of June 30, 2011, according to the San Francisco Chronicle. Thus, major devaluation of the dollar would hurt China, as it would be left holding wads of worthless paper.
“If you owe the bank $100, that’s your problem. If you owe the bank $100m, that’s the bank’s problem,” American industrialist Jean Paul Getty once remarked, in a parable that sums up China’s predicament.
“China is locked into a position where they cannot sell a big portion of their dollar reserves overnight without hurting themselves,” Aizenman said. “It is too late for now to diversify rapidly the stock they have already accumulated.”
The answer: Buy gold. Everyone seems to be doing it. The value of the glistening commodity, useless for most practical purposes, increased almost 400 per cent, from less than $500 an ounce in 2005 to about $1,900 in September.
“Gold has risen in value because of uncertainty in the world economy,” said Mark Weisbrot, the co-director of the Center for Economic and Policy Research, a think-tank in Washington. “Normally, gold would rise due to high inflation. It is a store of value that increases if there is inflation. But in this case it is going up because nobody knows where else to put their money.”
In the WikiLeaks cable, China alleged that “the US and Europe have always suppressed the rising price of gold”, but neither Weisbrot or Aizenman think such a policy is taking place or even possible.
Presently, China places strict controls on its currency, limiting foreigners from doing business in the yuan or trading it on foreign exchange markets. That could change in the next five years, according to governor Xiaochuan’s recent announcement.
By owning such large reserves of US currency, and through controlling the yuan, China can keep its currency lower than it would be if it floated freely. This makes Chinese exports cheaper.
The relationship, in which Chinese investment in US government bonds allows low interest rates for Americans to buy Chinese products, has worked well for the last 15 years. In 2010, the US ran a $273.1bn trade deficit with China.
“We pay our debts in dollars so we can print money to pay our international debts,” Weisbrot told Al Jazeera. Because of the dollar’s status as a reserve currency, the US “can run trade deficits indefinitely” while borrowing internationally without serious repercussions, giving the world’s largest economy a “big advantage”, he said.
If gold, the yuan, or a combination of other currencies replaced the dollar, the US would lose that advantage.
Without a replacement in the near term, nothing will replace the dollar as the world’s reserve currency in the next five years at least. But nothing lasts forever. “When they [China] want the dollar to fall, they will let it,” Weisbrot said. “The dollar will fall eventually but that could be a long time away.”
The fate of the dollar notwithstanding, a separate WikiLeaks cable outlines some of the broader ambiguities of the world’s most important economic relationship, or “ChinAmerica”, as it has been dubbed by historian Niall Ferguson.
“No one in 1979 would have predicted that China would become the United States’ most important relationship in thirty years,” the cable stated. “No one today can predict with certainty where our relations with Beijing will be thirty years hence.”
August 2nd, 2011
The Financial Post
Gold rallied to its ninth record high this year on Tuesday, as growing fears about the spread of the European debt crisis and the increasingly gloomy outlook for the U.S. economy fed a broad investor push into perceived safe-haven assets.
U.S. lawmakers averted an unprecedented default on the country’s debt on Monday but the likelihood of the United States losing its top-notch credit rating as a result of its ballooning deficits boosted the likes of gold, the Swiss franc and German government bonds.
Stocks and bonds of the euro zone’s more fragile members came under fire on Tuesday, pushing yields on Spanish and Italian debt to 14-year highs, while Italian authorities held emergency talks and Spain’s economy ministry kept in permanent contact with its European Union counterparts to try to stem the crisis.
Spot gold (XAU-) was last up 1.3 percent on the day at US$1,638.79 an ounce by 1250 GMT, having touched an all-time high of US$1,640.39 earlier in the day, marking its ninth record this year ahead of the vote in the U.S. Senate later to enshrine the last-minute deal on raising the country’s debt limit into law.
“There’s a market saying ’buy the fear, sell the greed.’ Now obviously, people have been buying the fear, certainly for metals and therefore, later today, and early tomorrow in Asia, do you start to sell the greed? I don’t know,” said Credit Agricole analyst Robin Bhar.
“The U.S. has averted default, but not averted downgrade, so that’s the driving thought. I would have thought gold would pause for breath and move lower, I thought US$1,650 would be the target two or three months down the road,” he said, adding: “There’s no stopping it, and there’s no point standing in the way of it. You just don’t know where the top is going to be.”
Gold has rallied by some 15 percent so far this year, hitting record highs in dollars, euros, sterling, rand and Canadian dollars, indicating investors’ distrust of volatile currencies, while central banks have thus far remained buyers of bullion, with South Korea the latest addition to that list after its first purchase in over 10 years.
South Korea’s central bank said on Tuesday it bought 25 tonnes of gold between June and July to diversify its foreign reserves despite high prices, marking its first purchase in more than a decade and taking its total gold holdings to 39.4 tonnes.
“This news reiterates the fundamental view that most investors, asset managers, and even central banks hold true — that gold remains the quintessential currency hedge, a stabilizing asset for portfolios, and a safe haven in uncertain economic times,” said David Meger, director of metals trading at Vision Financial Markets, a futures broker based in Chicago.
The United States is poised to step back from the brink of economic disaster on Tuesday as a bitterly fought deal to cut the budget deficit is expected to clear the Senate and President Barack Obama’s desk.
Just hours before the Treasury’s authority to borrow funds runs out — risking a damaging U.S. debt default — the Senate was expected to approve the deal to cut the country’s bulging deficit and lift the US$14.3 trillion debt ceiling enough to last beyond the November 2012 elections.
Risk appetite might return now there is agreement on the country’s borrowing limit, but the gloomy economic outlook in the world’s largest economy combined with an ongoing euro zone debt crisis could depress such sentiment, traders and analysts said.
“Gold should be lower after the U.S. debt ceiling deal is reached, but it remains firm as people don’t trust the dollar and would still like to put their money in gold,” said Peter Fung, head of dealing at Wing Fung Precious Metals based in Hong Kong.
Gold priced in euros (XAUEUR-R) rose by 1.7% on the day to hit a record 1,157.51 euros an ounce, while sterling-priced gold also hit a record peak at 1,009.05 pounds an ounce (XAUGBP-R) and gold in Canadian dollars (XAUCAD-R) rose more than 1.5% to a record $1,575.34 an ounce.
In other precious metals, silver (XAG-) was up 1.1% at US$39.68 an ounce, while the platinum group metals were modestly higher, with platinum (XPT-) up 0.1 percent at US$1,790.24 an ounce and palladium (XPD-) up 0.1% at US$826.22 an ounce.
June 28th, 2011
By: Jack Farchy
The US dollar will lose its status as the global reserve currency over the next 25 years, according to a survey of central bank reserve managers who collectively control more than $8,000bn.
More than half the managers, who were polled by UBS, predicted that the dollar would be replaced by a portfolio of currencies within the next 25 years.
That marks a departure from previous years, when the central bank reserve managers have said the dollar would retain its status as the sole reserve currency.
UBS surveyed more than 80 central bank reserve managers, sovereign wealth funds and multilateral institutions with more than $8,000bn in assets at its annual seminar for sovereign institutions last week. The results were not weighted for assets under management.
The results are the latest sign of dissatisfaction with the dollar as a reserve currency, amid concerns over the US government’s inability to rein in spending and the Federal Reserve’s huge expansion of its balance sheet.
“Right now there is great concern out there around the financial trajectory that the US is on,” said Larry Hatheway, chief economist at UBS.
The US currency has slid 5 per cent so far this year, and is trading close to its lowest ever level against a basket of the world’s major currencies.
Holders of large reserves, most notably China, have been diversifying away from the dollar. In the first four months of this year, three quarters of the $200bn expansion in China’s foreign exchange reserves was invested in non-US dollar assets, Standard Chartered estimates.
The prediction of a multipolar currency world replacing the current dollar dominance chimes with the thinking of some leading policymakers.
Robert Zoellick, president of the World Bank, last year proposed a new monetary system involving a number of major global currencies, including the dollar, euro, yen, pound and renminbi.
The system should also make use of gold, Mr Zoellick added. The results of the UBS poll also point to a growing role for bullion, with 6 per cent of reserve managers surveyed saying the biggest change in their reserves over the next decade would be the addition of more gold. In contrast to previous years, none of the managers surveyed was intending to make significant sales of gold in the next decade.
Central banks have bought about 151 tonnes of gold so far this year, led by Russia and Mexico, according to the World Gold Council, and are on track to make their largest annual purchases of bullion since the collapse in 1971 of the Bretton Woods system, which pegged the value of the dollar to gold.
The reserve managers predicted that gold would be the best performing asset class over the next year, citing sovereign defaults as the chief risk to the global economy.
The yellow metal has risen 19.5 per cent in the past year to trade at about $1,500 a troy ounce on Monday, buoyed by the emergence of sovereign debt concerns in the US as well as eurozone debt woes.
April 25th, 2011
By: Brett Arends
The International Monetary Fund has just dropped a bombshell, and nobody noticed.
For the first time, the international organization has set a date for the moment when the “Age of America” will end and the U.S. economy will be overtaken by that of China.
And it’s a lot closer than you may think.
According to the latest IMF official forecasts, China’s economy will surpass that of America in real terms in 2016 — just five years from now.
Put that in your calendar.
It provides a painful context for the budget wrangling taking place in Washington, D.C., right now. It raises enormous questions about what the international security system is going to look like in just a handful of years. And it casts a deepening cloud over both the U.S. dollar and the giant Treasury market, which have been propped up for decades by their privileged status as the liabilities of the world’s hegemonic power.
According to the IMF forecast, whomever is elected U.S. president next year — Obama? Mitt Romney? Donald Trump? — will be the last to preside over the world’s largest economy.
Most people aren’t prepared for this. They aren’t even aware it’s that close. Listen to experts of various stripes, and they will tell you this moment is decades away. The most bearish will put the figure in the mid-2020s.
But they’re miscounting. They’re only comparing the gross domestic products of the two countries using current exchange rates.
That’s a largely meaningless comparison in real terms. Exchange rates change quickly. And China’s exchange rates are phony. China artificially undervalues its currency, the renminbi, through massive intervention in the markets.
The comparison that really matters
The IMF in its analysis looks beyond exchange rates to the true, real terms picture of the economies using “purchasing power parities.” That compares what people earn and spend in real terms in their domestic economies.
Under PPP, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the size of the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America’s share of the world output down to 17.7%, the lowest in modern times. China’s would reach 18%, and rising.
Just 10 years ago, the U.S. economy was three times the size of China’s.
Naturally, all forecasts are fallible. Time and chance happen to them all. The actual date when China surpasses the U.S. might come even earlier than the IMF predicts, or somewhat later. If the great Chinese juggernaut blows a tire, as a growing number fear it might, it could even delay things by several years. But the outcome is scarcely in doubt.
This is more than a statistical story. It is the end of the Age of America. As a bond strategist in Europe told me two weeks ago, “We are witnessing the end of America’s economic hegemony.”
We have lived in a world dominated by the U.S. for so long that there is no longer anyone alive who remembers anything else. America overtook Great Britain as the world’s leading economic power in the 1890s and never looked back.
And both those countries live under very similar rules of constitutional government, respect for civil liberties and the rights of property. China has none of those. The Age of China will feel very different.
Victor Cha, senior adviser on Asian affairs at Washington’s Center for Strategic and International Studies, told me China’s neighbors in Asia are already waking up to the dangers. “The region is overwhelmingly looking to the U.S. in a way that it hasn’t done in the past,” he said. “They see the U.S. as a counterweight to China. They also see American hegemony over the last half-century as fairly benign. In China they see the rise of an economic power that is not benevolent, that can be predatory. They don’t see it as a benign hegemony.”
The rise of China, and the relative decline of America, is the biggest story of our time. You can see its implications everywhere, from shuttered factories in the Midwest to soaring costs of oil and other commodities. Last fall, when I attended a conference in London about agricultural investment, I was struck by the number of people there who told stories about Chinese interests snapping up farmland and foodstuff supplies — from South America to China and elsewhere.
This is the result of decades during which China has successfully pursued economic policies aimed at national expansion and power, while the U.S. has embraced either free trade or, for want of a better term, economic appeasement.
“There are two systems in collision,” said Ralph Gomory, research professor at NYU’s Stern business school. “They have a state-guided form of capitalism, and we have a much freer former of capitalism.” What we have seen, he said, is “a massive shift in capability from the U.S. to China. What we have done is traded jobs for profit. The jobs have moved to China. The capability erodes in the U.S. and grows in China. That’s very destructive. That is a big reason why the U.S. is becoming more and more polarized between a small, very rich class and an eroding middle class. The people who get the profits are very different from the people who lost the wages.”
The next chapter of the story is just beginning.
U.S. spending spree won’t work
What the rise of China means for defense, and international affairs, has barely been touched on. The U.S. is now spending gigantic sums — from a beleaguered economy — to try to maintain its place in the sun. See: Pentagon spending is budget blind spot .
It’s a lesson we could learn more cheaply from the sad story of the British, Spanish and other empires. It doesn’t work. You can’t stay on top if your economy doesn’t.
Equally to the point, here is what this means economically, and for investors.
Some years ago I was having lunch with the smartest investor I know, London-based hedge-fund manager Crispin Odey. He made the argument that markets are reasonably efficient, most of the time, at setting prices. Where they are most likely to fail, though, is in correctly anticipating and pricing big, revolutionary, “paradigm” shifts — whether a rise of disruptive technologies or revolutionary changes in geopolitics. We are living through one now.
The U.S. Treasury market continues to operate on the assumption that it will always remain the global benchmark of money. Business schools still teach students, for example, that the interest rate on the 10-year Treasury bond is the “risk-free rate” on money. And so it has been for more than a century. But that’s all based on the Age of America.
No wonder so many have been buying gold. If the U.S. dollar ceases to be the world’s sole reserve currency, what will be? The euro would be fine if it acts like the old deutschemark. If it’s just the Greek drachma in drag … not so much.
The last time the world’s dominant hegemon lost its ability to run things singlehandedly was early in the past century. That’s when the U.S. and Germany surpassed Great Britain. It didn’t turn out well.
February 16th, 2011
RTE News and Business
France, as current head of the Group of 20 countries, will help the transition to a global financial system based on ‘several international currencies’, French Economy Minister Christine Lagarde said today.
Lagarde, speaking ahead of a G20 finance ministers meeting in Paris on Friday and Saturday, said the world had to move on from the ‘non-monetary system’ it now has to one ‘based on several international currencies’.
Accordingly, France wants to see less need for countries, especially the emerging economies, to accumulate huge foreign reserves, she said.
At the same time, international capital flows should be better regulated and the role of the Special Drawing Rights issued by the International Monetary Fund should be reinforced by the inclusion of China’s yuan in the system.
China, whose booming economy now ranks second only to the US in size after overtaking Japan, has accumulated massive forex reserves of more than $2.5 trillion on the back of its sustained trade surpluses and foreign fund inflows.
Washington says the build-up reflects an unfair undervaluation of the yuan, a charge Beijing rejects.
France has previously said it wanted to see the global financial system reduce its reliance on the dollar for a more broad-based arrangement.
February 7th, 2011
By: Charles Riley
The Swiss franc, one of the world’s strongest currencies, has been on a tear in recent months, and is now flirting with a new all time high against the U.S. dollar.
The Swiss currency has spiked more than 20% against the dollar since June, when Europe’s sovereign debt crisis sparked a flood of money into the franc amid worries about the unfolding crisis.
The currency might continue to move sharply higher, due to concerns that violence in Egypt might destabilize the region.
“What is driving the flow is a safe-haven bid, and the Swiss franc has been bought aggressively due to the situation in Cairo,” said Kathy Lien, director of currency research for Global Forex Trading.
That’s the same way traders usually talk about the U.S. dollar. But that might be old news. The market is treating the franc like a modern-day Maginot Line against geopolitical upheaval.
“The dollar used to be a safe haven,” said Lien. “And still is to some degree, but not like the franc.”
Europe debt woes take a vacation
What has changed? For one, investors are skittish about the amount of debt that is being carried by the U.S. federal government. If rating agencies were to downgrade U.S. debt, the implications would be enormous for the dollar.
And the U.S. economy just isn’t recovering quickly enough for investors to feel confident. “There is still an extreme amount of spare capacity in the U.S. economy,” Lien said.
But why Switzerland?
“The Swiss franc is seen as in independent island in the middle of very stormy seas,” said Brian Dolan, chief currency strategist at Forex.com.
Switzerland, unlike many other countries in Europe, has a relatively low debt level, and its economic recovery has outpaced that of the United States.
“They didn’t have quite as large a downturn there. Whereas the U.S. saw 5% to 6% contractions in GDP, the Swiss only had 3%,” said Dolan.
Track currency rates
But having a strong currency isn’t always a good thing. For one, Swiss products will become more expensive for other countries to buy. And that has the Swiss government very worried.
In the wake of the global recession, the Swiss central bank has intervened in the currency market, hoping to stem the franc’s prolonged rally and protect the country’s export business.