You’ve heard the bears trashing the greenback; let’s see what the bulls are saying

There are plenty of naysayers out there predicating the doom of the US Dollar but there are also many top experts forecasting the opposite. Last week we showed you a negative outlook; this week senior analyst Carl Delfeld outlines his take on the direction of the Dollar. He believes the Dollar will stay on top for two reasons, the weakness of competitors and the stable, flexible and open political institutions of America.

“Both are important factors to observe after you look at the three basic characteristics of a durable reserve currency:

• Durable reserve currencies are strong, stable and provide ample liquidity – A reserve currency should demonstrate deep liquidity so investors can move in and out of it without sharp movements in price. It also needs to be widely recognized by global investors as a reserve currency.

• Reserve currencies require financial and political stability – The fiscal discipline and political stability of the country needs to be unquestioned. Countries with large fiscal deficits are unable to be dependable safe havens since the path of least resistance is to devalue the currency to make debt loads more manageable.

• Reserve currencies come from market-based, rules-driven, open economies – Investors and trading partners thrive best in a market-oriented economy where the rules are clear and transparent. Faith in the fairness of the judicial system and institutions is vitally important.

His focus then shifts to what rival currencies can possibly take over for the Dollar. European nations have been in constant disarray for the past year. Greece’s debt issues have been constantly reappearing, in turn shaking up global markets and causing fear among investors. This sovereign debt crisis doesn’t look to get turned around anytime soon.

The next big player on the list is the Yuan. Mr. Delfeld’s remarks are even more direct here: “No offense, but this is simply ridiculous, and here’s why…

The first important issue is liquidity. The Chinese Yuan isn’t even convertible. The government forces Chinese exporters who receive U.S. Dollars to turn them over to the Central Bank. (This is how China built its $3 trillion in reserves). Citizens can’t take it out of the country. It isn’t accepted as legal tender anywhere outside of China.

The other problem with the Yuan or Renminbi is that it’ll be a long, long time before China allows its currency to float freely. China built its entire system on tightly controlling their currency’s value. If the currency strengthened 10% against the U.S. Dollar in six months, millions of exporters already on razor-thin margins would go bust.

In addition, China’s weaknesses as a global safe haven are glaringly obvious. Two examples should suffice: All of its strategic industries are firmly in state hands and its judicial system is anything but independent. That shouldn’t instill much global confidence.”

Tell us what you think. Is the Dollar firmly entrenched in its place as the world reserve currency?

Email us at  iinvest@chesapeakeinvestment.com.

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Chesapeake Investment Services
Managed Futures Specialists