Why USD is considered as a safe investment

Rhody Trader · Dec 19, 2009

secondary said:
Is it simply the case that in times global uncertainty US government bond is seen as the safest investment, thus investors rush into buy USD for US treasuries? What is the rationale behind thinking a country with large twin deficit is the safest economy?

This is exactly the case, and since most of the money goes into short-term instruments (T-Bills) the twin deficit thing isn't something investors are worried about. They just want to know they'll get their money back.

secondary · Dec 19, 2009

Rhody Trader · Dec 20, 2009

Market started thinking the Fed would raise rates sooner.

secondary · Dec 20, 2009

virtuos0 · Dec 20, 2009

secondary said:
I read a lot from the press that as risk appetite wanes, USD rises. And I am confused.

Looking at in terms of Carry trade, it makes sense as USD now is the funding currency and as other target currencies get riskier, investors tend to return to funding currency to pay back the borrowing, requiring to convert back to USD and hence raising the currency.

But USD rose a great deal when the Lehman fell, when USD, in fact, was the target currency - which tells me looking in terms of carry trade is illogical.

Is it simply the case that in times global uncertainty US government bond is seen as the safest investment, thus investors rush into buy USD for US treasuries? What is the rationale behind thinking a country with large twin deficit is the safest economy?

+ can anybody offer some tips on getting a better sense of macro understanding ?

Thanks

You should bear in mind that when looking at what is a safe or risky investment the actual level of debt and/or deficit is way down the list of things that matter to investors.

With our current absurd monetary system, and the way banking works, 'money' quite literally IS 'debt'. The real collapse in the dollar will come when the US can't find a buyer for its debt, but at the moment the US has a readymade debt hoover by the name of China. It's a kind of symbiosis. Due to this symbiosis the dollar is 'safe'.

Rhody Trader · Dec 20, 2009

secondary said:
So, the short term treasuries which was otherwise a safety investment became even more attractive as the yield rose?

No. Dollar became more attractive on the presumption of higher rates of return on dollar denominated assets (not necessarily T-Bills) in the future.

I read on FT on how this was the first time the USD rose in response to a good economic news since the fall of lehman - how there was a real shift in inflation expectations. I am afraid I cannot fully recollect the article but if you can, can you give me an example when the USD fell on good news ? and the reasons for this ?

There were many instances of the dollar falling on good economic data. It did so because the data represented improvement in growth prospects not just in the US, but probably globally as well. In that view the risks of holding non-dollar assets are seen as lower and thus investors looked to higher returning markets. Partly the dollar carry trade is involved there as well.

t2wfx · Dec 23, 2009

US Dollar? Safe investment... really? If it is i think now is a good time to get in as it is climbing, i think...

Why USD is considered as a safe investment

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