What is the trend of the dollar

10 July 2009 Once again we put the dollar in the center of the debate. The controversy surrounding the possible downward continuation in the medium to long term against major currencies, remained at the center of the debate. For now, the recovery in risk appetite has led him to weaken against the euro and the move to close yesterday at $ 1.4025 in European Currency Unit. Is it advisable to bet against the dollar in the medium term?

Risk aversion that investors have experienced in the most tense moments of the international financial crisis has undoubtedly been the main ally of the U.S. currency. This behavior of global investors has been a clear signal that it still relies on the dollar as a strong currency.

This situation of a dollar strengthened in the context of deep crisis caused by the U.S. financial system itself in a terrible fiscal and external deficits in continuous growth that has lived for the past year has been an otherwise contradictory. Not many logical explanations for why investors were confident at that time (and now) in the currency of a country that was virtually on the brink of the precipice. Certainly does not seem a rational decision.

The trust that has generated decades the dollar has undoubtedly kept in spite of everything, in this critical period. You may also imply a wish to avoid falling for not collapse next to him given the high exposure that the world has against the U.S. currency. However, this trust has begun to weaken and have already seen the first "Betrayal," which are repeated with increasing frequency and will continue to grow increasingly uncertain future of the dollar.

We must look to the dollar today from two perspectives: the short and long term. In the short term, the dollar has further arguments to avoid weakening. High exposure to international stocks of developed and emerging economies to assets denominated in U.S. currency, is one of the elements that hold a more abrupt fall of the U.S. currency. The lack of a global currency to replace it also plays in favor of the dollar. And the alternative to a currency basket is not yet well defined, and casts doubt on the central banks.

In the long term, the decision is made. The dollar has lost his kingdom and probably does not take into account as the economic foundations for this. Clear that the macroeconomic fundamentals and importance will be taken into account in the valuation of the dollar even though their demand is reduced according to the demand from the economies of other currencies as international reserves.

Competition from alternative currency will be higher. The euro will fight for greater global participation will be key if the ECB to act so that the Fed makes in the conduct of the dollar. But the logic of the ECB's obsession with inflation, it removes reaction capability to manage a currency that the leadership intends pelearle the dollar. Other currencies are recorded in the competition. China wants to impose on the yuan as an international currency, but their low liquidity and the level of intervention that have, they have to wait some time and work hard to achieve their goal.

At the G8 summit, the dollar was at the center of the debate. Before the summit, Arkady Dvorkovich, economic adviser to the Kremlin, had anticipated: "China and Russia raised their position that the global exchange rate system requires the establishment of several regional reserve currencies, which then could become international." China has about 70% of its reserves in dollars.

According to Reuters, during the G8 meeting, the Chinese state councilor, Dai Bingguo, called upon the world to diversify the reservation system and point to a relatively stable exchange rates, in what represents a clear attack on the U.S. currency.

All the attacks against the U.S. dollar. Will debilitádose in the medium to long term? Obama had pledged to hold its value. The strength of the currency is part of the government's economic strategy. The question is to know how much effort Obama is willing to do to achieve this goal and how you can stand the temptation that may generate a weak dollar will benefit the competitiveness of the U.S. economy.

Investors are already making their bets against the dollar. Axel Merk, manager of the Merk Hard Currency fund (Merkx) and Asian Currency (MEAFX) Funds, recognized in The Wall Street Journal "that you are taking long positions against the dollar because it sees a future weakening of the U.S. currency. The first of these funds are up 24% in cash in euros, 17% in Norwegian kroner (encouraged by the revenue that the country receives for its oil exports), about 35% in commodities linked to the currencies of Australia, Canada New Zealand, and 14% in gold.

Another big bet on the market is inevitable for the yuan appreciation will have on the Chinese government give in to pressure, mainly from the U.S. currency to strengthen against the dollar. This bet on the yuan is via exchange rate hedges, which are made through banks with large stakes in the direction that behaves yuan.

The world knows that in the short term can not drop the hand to the dollar for two reasons. The first is the great commitment of investment of the international reserves of countries in dollar-denominated assets. The second reason is that the dollar is providing a containment dike at the increase in uncertainty in the markets. If the dollar, which is one of the few refuges for reliable investor falls, then the crisis can be immeasurable dimensions.

In the medium and long term, however, the dollar has lost its global leadership as reflected in a lower overall demand for assets denominated in that currency, which will be weakened against the U.S. inability to sustain.