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The dollar’s safe-haven status is getting stronger by the day.
As the euro zone edges ever closer to what many fear will be a sort of Armageddon, with many European banks now poised to be downgraded, flows out of the region are starting to build.
With most emerging market and commodity currencies posing little alternative, as they too come under pressure from slowing global growth, the U.S. looks increasingly like a beacon of prosperity.
All in the U.S. is hardly well, of course.
As Fitch reminded us on Monday, the country’s financial position isn’t viable in the longer term if it doesn’t start cutting its budget deficit soon.
But as the credit agency suggested by confirming its triple-A rating for now, all is well for the time being.
Despite the gloom and despondency elsewhere in the global economy, the U.S. has been showing signs of steady improvement over the past month or two. Not only has manufacturing and consumer activity picked up, but there are flickers of life returning to the housing market and, as data this Friday should confirm, the jobs market is finally getting better.
In the greater scheme of things, this recovery is hardly robust and remains very much at risk if the euro zone itself heads back into recession.
But as a relatively closed economy, the U.S. may be able to sustain at least some growth for a little while, boosting its status as a safe haven for wary investors.
Investors have been showing their appetite for U.S. Treasury bonds for some time now, with 10-year Treasury yields being driven under 2% in the past month or so after reaching a high of about 3.75% in February.
For some time, investors had also been happy to pile into German bonds but this all came to a shuddering halt last week when Berlin tried and failed to raise the funds it needed.
Investor confidence in the euro zone appeared to have reached a new low with even core countries finding themselves tarred with the problems of the peripheral debtors.
France has been threatened with its own downgrade by Standard & Poor’s and Moody’s has lined up 87 European banks for review.
It comes as no surprise that banks are slashing their exposure to the region with Nomura among the latest to admit that its loans to the periphery have been cut by 75%. And some countries such as Italy and Portugal are now asking their own banks to remain patriotic and support their own government’s debt auctions.
Each for his own here!
With data continuing to suggest that the euro-zone economy is heading back into recession and with growing pressure on the European Central Bank to pursue monetary easing, support for the single currency is just ebbing steadily away.
And this time around, there are few alternatives.
With the euro-zone debt crisis depressing global growth, commodity and emerging market currencies are coming under pressure too.
And with both the U.K. and Japanese economies both failing to live up to expectations, the pound and the yen have seen safe-haven flows start to slip.
For the dollar, this will only be good news as global conditions deteriorate even more and international investor interest elsewhere continues to decline.
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The Source is WSJ.com Europe’s home for rapid-fire analysis of the day’s big business and finance stories. It is edited by Lauren Mills, based in London.
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