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William Watts's Forex Files
March 21, 2011, 10:01 a.m. EDT
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Schwab's OptionsXpress deal isn't option for all
By William L. Watts, MarketWatch
LONDON (MarketWatch) "” Once upon a time, not long ago, the dollar was a preferred port in any storm.
But with black swans coming home to roost from Japan to the Middle East, the greenback is finding it difficult to generate anything other than an occasional burst of safe-haven buying. Just take a look at the dollar index /quotes/comstock/11j!i:dxy0 (DXY 75.41, -0.31, -0.41%) , which last week flirted with its 2009 low even as fears mounted over a nuclear catastrophe in Japan not to mention deepening turmoil in several countries across the oil-rich Middle East.
S&P 500 (1 YEAR)
But what has served to cap the greenback's long-running role as a haven of choice when buildings begin to shake or the shooting starts?
It's not simply a matter of growing government debt and deficits.
After all, the March 11 earthquake and tsunami only heightened the safe-haven appeal of the Japanese currency. Buyers of the yen were hardly daunted by fears of the inevitable post-quake jump in Japanese government spending that's set to add to a debt pile already twice the size of the economy.
And financing the U.S. government deficit hasn't been terribly difficult.
While the recent narrowing of the U.S. current account deficit "” the broadest measure of the trade gap, which includes the difference between savings and investment "” may be hard to sustain, data on capital flows show no lack of appetite for Treasurys and other U.S. securities, noted David Deddouche, currency strategist at Societe Generale in Paris.
What's more telling, however, is that the data show the role of U.S. Treasurys in financing the current-account gap has seen a sharp rise since 2008 and remains elevated, he said in a research note.
In other words, the United States is financed through very low-yielding instruments, rather than demand from global investors attracted to private-sector assets, Deddouche said.
That's left the currency increasingly sensitive to interest rates, which is not a dollar-friendly environment what with the Federal Reserve seen lagging the likes of the European Central Bank and the Bank of England in raising interest rates.
And while interest-rate differentials make the dollar less attractive against the likes of the euro, traders have other reasons to ponder how voracious the appetite of the biggest overseas buyers of Treasurys will remain.
As Deddouche notes, China's turning its attention to domestic growth, which would likely translate into smaller foreign-exchange surpluses and, consequently, a lessening of demand for U.S. and other foreign assets.
The implications of the earthquake, tsunami and nuclear problems could well mean a fall in Japan's Treasury holdings, while Middle East oil producers will increasingly use reserves to subsidize food purchases in an effort to stem the potential for social unrest, he said.
The U.S. and its allies intensified air attacks against forces loyal to Col. Moammar Gadhafi on Monday.
Beat Siegenthaler, senior currency strategist at UBS, says the key culprit is the fear that the Fed could be tempted to unleash "QE3" "” a third round of so-called quantitative easing if the global economic outlook sours.
"In short, the dollar is not currently a safe haven in times of macroeconomic uncertainty because any downward revision in global and U.S. growth automatically means a higher risk of QE3," Siegenthaler wrote in a note to clients.
He argues that the dollar won't regain its status until that threat passes. And even if QE2 "” the Fed's current program of buying up to $600 billion in Treasury bonds "” ends as scheduled in June, this may not be enough unless the U.S. central bank rules out prescribing a further dose of monetary stimulus.
William L. Watts is a reporter for MarketWatch in London.
Charles Schwab's announcement that it will purchase OptionsXpress Holdings Inc. is likely to make financial "?power tools' available to a lot more ordinary folks "” and dramatically increase the chance that novices will harm their portfolios.
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