Dollar Losing Some Of Safe Haven Status? By Nicholas Hastings

Confidence in the dollar has been damaged.

Not so long ago, the U.S. currency was second only to the yen in terms of global safe havens.

Each time investors got worried about the global recovery, they headed out of the euro and other high risk currencies straight into the dollar and into the yen.

But this isn't happening for the dollar any more.

See how the dollar has started to go nowhere against the euro:




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As the U.S. economic recovery shows signs of sputtering and as the U.S. finds itself at odds with the euro zone over further fiscal expansion, investors appear to be scouting around elsewhere with even the pound or the Swiss franc showing signs of greater resilience against the U.S. currency.

Both of these currencies have also continued to rise sharply against the euro, unlike their U.S. counterpart.

This shift in currency flows became more apparent this week as the U.S. Federal Reserve issued a statement after its last open market committee meeting that essentially lowered the U.S. growth, downgraded inflation prospects and recognized the depressed state of the U.S. housing market.

In other words, the Fed acknowledged that the recovery isn't quite as robust as it previously thought and financial markets rushed to push their expectations for a U.S. interest rate hike early next year all the way back to early 2012.

Of course, slower growth in the U.S. is hardly good for the global economy and the continuing concern over the European debt crisis will still take its toll.

Nevertheless, it is evident that the dollar is losing the yield advantage that was helping it before.

"It is becoming increasingly clear that the dollar will be unable to develop a rate advantage over euro or yen for some time to come. It will therefore be difficult for the dollar index to return to the highs recorded at the beginning of the month under its own power," said Ulrich Leuchtmann, the head of Commerzbank's currency strategy team based in Frankfurt.

Additional disappointment for the U.S. currency came this week as China failed to allow its currency to rise as many expected. Last weekend, Beijing released its official peg that fixed the yuan to the dollar since 2008.

However, the yuan has made only minimal headway since then, suggesting that the authorities are reluctant to let the currency go just yet.

Falling confidence in the dollar also comes as policy differences between the U.S. and most other members of Group of 20 industrial and developing nations widen, ensuring a lively debate when leaders from these countries meet in Canada this weekend.

While the Obama administration is keen to ensure recovery through further fiscal expansion, most euro-zone countries, as well as the U.K., are now going the other way, cutting spending and raising taxes in an effort to reduce record high budget deficits.

As Steve Barrow, senior currency strategist with Standard Bank in London, points out, fiscal expansion is an option only for the U.S., given the global importance of the dollar and the U.S. Treasury market.

As recent events in Greece and other euro-zone markets have shown, and the decline in the euro continues to show, international investors are hardly enamoured by large budget deficits elsewhere.

But, as Barrow admits, fiscal expansion in the U.S. will only support the dollar as long as international investors are still prepared to finance it.

Developments this week could be an indication that they may not be prepared to do this as much as they were before.

Early Friday in Europe, the dollar was showing little strength, even though China did allow the yuan to rise a little again overnight. Instead, the continued rise in the cost of Greek credit default swaps to a record high and uncertainty over what will come out of the G20 summit this weekend.

By 0700 GMT, the dollar was up at Y89.65 from Y89.49 late on Thursday in New York, according to EBS. The euro was up at $1.2347 from $1.2328 and at Y110.74 from Y110.28.