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Dollar regains luster in crisis

World rallies to safe haven

By Patrice Hill (Contact) | Sunday, November 30, 2008

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Amid the worst recession and financial crisis in a generation, the U.S. Treasury and the dollar lately have reasserted their status as safe havens in a world of storms.

The unique privilege this status confers is helping Americans in major ways to weather the hard times. Among other things, the Treasury is getting nearly interest-free loans to finance ballooning debts and deficits as investors flock to U.S. securities to escape stricken stock, commodity and credit markets around the world. That is enabling the Treasury to issue an unprecedented $1.5 trillion of debt this year -- nearly three times its previous record -- to finance ballooning federal deficits and rescue a faltering banking and financial system.

The rush into Treasury securities in the wake of the financial crisis that broke out in September suddenly lifted the dollar by as much as 30 percent against other major currencies like the euro and the British pound. Previously, the dollar had suffered a long, six-year decline that left Americans paying record high prices for imported goods from Italian olive oil to Saudi crude oil. The dollar's revival now makes those imports cheaper, providing purchasing-power relief to consumers as they struggle to cope with job cuts and recession.

Rob Cox, analyst with Breakingviews.com, said the fear and panic set off by gigantic losses in global markets -- which returned with a vengeance as the economic outlook darkened last week -- makes investors hanker for the predictable and safe, if boring, returns provided by Treasuries.

"When investors take fright, they seek the comfort of safe securities like Treasury bonds," he said.

The trend helps not only the Treasury as it scrambles to aid U.S. banks, but the Federal Reserve in its mission to resuscitate the U.S. economy and markets. The sudden strength of the dollar has been accompanied by a precipitous fall in oil and other commodity prices, which are denominated in dollars, easing the chief source of inflation that prevented the Fed from lowering interest rates this summer.

As foreign investors pour money into Treasury bonds, the dollar's strength has surprised some pundits, who predicted that the financial crisis that began in the United States more than a year ago would prove to be the downfall of the dollar.

Fed Chairman Ben S. Bernanke said last week that the dollar's rebound proved critics wrong and vindicated the safe-haven role of U.S. markets.

"The dollar remains the premier international currency," he told the House Financial Services Committee. "We have seen a good bit of appreciation in the dollar recently during the crisis, precisely because there has been a lot of interest in the safe haven and liquidity of dollar markets."

Dollar detractors have proliferated in recent years, from radical oil-exporting nations such as Iran and Venezuela that want to strike out against the United States by trading oil in euros rather than dollars, to Russia, which has promoted the euro as a reserve currency by investing substantial portions of its oil surpluses in the European currency.