May 112011
Published on Tue, May 10, 2011 CNBC Is US dollar’s recovery tied to death of bin Laden?Concern about mounting budget deficits on the state and federal level, along with the Federal Reserve’s easy money policies, sent the US dollar reeling earlier this year to near a post-gold reserve low. Then on May 2, a Navy Seal team killed Osama Bin Laden, the world’s most wanted man, responsible for the 9/11 tragedy on American soil. That day, the dollar index, which measures the currency versus a basket of six others, would bottom and is now nearly 3 percent higher. Coincidence? Many traders say, “I think not.” “The fact that we killed this guy and did it so efficiently was a wake up call to people who had forgotten that this is the dominant military in the world,” said Steve Cortes, founder of Veracruz research and a ‘Fast Money’ trader. There were many reasons throughout history that a currency has become the reserve money of the world, but the most common has been the country’s military might, specifically that of its navy. If a country controls the seas, then it controls trade and therefore can sustain its spot as the largest economy in the world. Recently, this reason seems to be lost on many predicting the end of the dollar as the world’s reserve currency. Even besides this rather barbaric notion, there are many more reasons why the dollar will retain its reserve status for a very, very long time, notwithstanding many ups and downs, wrote John Shin, Bank of America Merrill Lynch FX Strategist, in a note. Most notably, he cited the size of our economy and the depth of our financial markets. “The US is still the largest economy compared to the Eurozone, and at the moment China’s economy is roughly a third the size of the US economy,” said Shin. “The lion’s share of currency trade still involves the US dollar and the sheer liquidity of the U.S. Treasury market is unrivaled by any other financial market for FX reserve managers.” The dollar’s run since last week has been aided by a flare up in the Greece situation in Europe. The country is on track to miss its fiscal targets and rumors of a bond haircut or a complete fissure from the European Union are hitting the Euro. Meanwhile, global investors are seeking the safety of the 10-year US (more…)