Prospects for higher risk aversion to hurt dollar
By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) - Prospects for a prolonged period of risk-aversion stemming from the recent volatility in global markets could be bad news for the dwindling ranks of dollar bulls.
Not so long ago, the dollar benefited during periods of diminished enthusiasm for risk, buoyed by its status as the world's preferred reserve currency. Now, though, the dollar is rapidly losing that safe-haven status thanks to an ever-growing U.S. current account deficit, and more recently a vague, often conflicted monetary policy from the Bush administration.
Instead, investors are turning to currencies with robust current account surpluses such as the Swiss franc <CHF=>, Norwegian crown <NOK=>, Japanese yen <JPY=>, and Canadian dollar <CAD=>.
Recent concerns that the global economy may be on the brink of a high-inflation, low-growth scenario fueled a flight away from risky assets, analysts say. At the same time, uncertainty surrounding major central banks' interest rate decisions and the continued withdrawal of global liquidity have contributed to an increase in market volatility.
"The dollar cannot be a beneficiary of higher risk aversion because of the high U.S. current account deficit and high valuations," said Jens Nystedt, currency strategist at Deutsche Bank in New York.
Current account is a measure of international trade, in physical goods and international transactions. The roughly $805 billion U.S. current account deficit at the end of 2005, equivalent to more than 6 percent of gross domestic product, has contributed to dollar weakness in three of the last five years.
U.S. monetary policy isn't helping, either. The minutes from the Federal Open Market Committee's May 10 meeting depict a Federal Reserve torn over how to properly balance quickening inflation and slowing economic growth. That ambiguity has deflated confidence in the dollar, exacerbated market uncertainty, and elevated risk aversion.