For the first time in months, investors are worrying about
prospects in the
U.S. and euro zone at the same time. Where, in
response to this double trouble, can currency investors go?
Fears about the global economy have tended, in the past, to
send investors fleeing into the greenback.
However, this time it may be different because the U.S. has
its own homegrown crisis: the fear that the fiscal cliff, an
automatic and abrupt fall in government spending and rise in
tax, will not be eliminated before it becomes reality in
In any rational world, a U.S.-specific crisis would be
bad news for the U.S. dollar, says HSBC. It acknowledges
that, at the moment at least, investors are not choosing to
inhabit this rational world. Anxiety about the fiscal cliff has
pushed up the dollar because its refuge status is, in the words
of HSBC, truly embedded in the psyche of the
market. However, HSBC warns that further safe-haven
buying in reaction to the fiscal cliff is
misguided, and therefore bound to run out of steam.
As a result, the reaction function to the fiscal cliff is
most likely to be a rally in the U.S. dollar followed by an
aggressive and swift fall making it an unpromising
haven, since by their very nature, haven assets do not exhibit
violent volatility that may catch out investors.
Buying the euro may be even riskier, because of renewed
fears that troubled euro zone economies may be too weak to bear
the heavy burden of debt. The European currency fell to a
two-month low of $1.266 last week on fresh fears about
Greeces fiscal position.
The Swiss franc, a historical safe haven, is more or less
closed for business following the Swiss National Banks
2011 decision to erect a currency ceiling. Sterlings
status as a more
recent refuge has attracted doubters who feel it may be
unworthy of the honor, following the Wednesday warning by Sir
Mervyn King, governor of the Bank of England, that the economy
may be in for a period of persistently low growth.
His decision to talk the pound down he described its 8
percent trade-weighted rise over the past year as not a
welcome development has also taken
some of the brio out of sterling bulls, since currency
investors are usually wary of testing their power against