| Safe Haven No More |
10 March 2003
|
Dollar Slides, Confounds Pre-War Tradition
Currency traders are nervous about war, even more than stock brokers and bond investors. Currencies are the ultimate in liquidity, so they reflect global uncertainty even faster than other investments. As the US and UK march toward war with Iraq, the dollar has lost value against the euro and yen contrary to its customary role as a safe haven in times of trouble. President Bush has broken new ground here, weakening the currency with the advent of war.
Naturally, when a country goes to war, the value of its currency drops on world markets -- war is not good for business despite the conventional wisdom (actually the benefit derives from the deficit spending war forces upon governments). But the US dollar has been a special case for over 60 years.
The way it used to work was clear enough. As war approached, people would take their money and exchange it for a currency that was not at risk -- the Swiss franc was always good for this. American economic might made the dollar a safe haven because if the US economy shriveled up and died, no place else would be worth anything either.
Now, though, the fear is that America will be a target of war-related terror while France, Germany and their fellow travelers will not be. So, the dollar is less attractive than the euro. What will happen after the first bombs drop is fairly certain, a dollar rally. However, the damage has been done. The dollar, despite America's claim to be the only superpower, is not what it was even 10 years ago.