Download The Resurgence of the US Dollar as a Safe Haven

The Resurgence of the US Dollar as a Safe Haven Currency
The US economy has added close to three million jobs in calender year 2014. US
unemployment rate is down to 5.6% as of December 2014 down from 6.6% levels seen in
January 2014. The strong labour market data, which is a key gauge for the Fed on US
economic health, suggests that the US economy is on track to grow steadily in the coming
years. US GDP growth for the 3rd quarter of 2014 was at 5% against growth rate of 4.6% in
2nd quarter and -2.1% seen in the 1st quarter.
The USD is showing signs of sustained strength against majors given its improving
economic fundamentals and given that its becoming increasingly self-dependent on oil. The
Fed ended its asset purchase program, from a peak size of USD 85 billion a month, in
October 2014. The Fed is also looking to raise rates from record lows of 0% to 0.25% in
2015. As opposed to the Fed turning policy neutral, the ECB cut policy rates to record lows
of 0.05% and cut the discount rate to -0.20% in its September 2014 policy meet. The ECB
is undertaking asset purchases for a total of Euro 1 trillion at Euro 60 billion a month until
September 2016.. The USD Index has rallied by 20% from lows seen over the last three
years and has gained against emerging currencies except the Chinese Yuan. Chart 1 and
Table 1.
Chart 1:
Table1:
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US economy and the US Dollar
The US economy runs a fiscal and current account deficit. US is the largest debtor nation in
the world and over 30% of its debt is held by foreigners. The US Federal Reserve (Fed) has
increased its balance sheet size by four times since 2007 as it pumped in unprecedented
amounts of money into the economy to bring it out of recession post the 2007-08 mortgage
crisis. Despite the US running twin deficits, large foreign holding of debt and money printing
by the Fed the USD is still considered a safe haven currency in times of global economic
crisis.
The reason for the US Dollar (USD) to be considered the currency of choice during times of
global economic stress is that it is still the most widely held currency in the world and the
US economy is seen as the most resilient of economies as it adjusts to economic cycles
quickly. US companies are able to downsize in times of downturns leading to improved
productivity in the economy. Other reasons for a strong US include the technology
leadership of the US in the world making one part of the economy resilient to downturns.
USD
The United States Dollar (USD) is the official currency of the United States of America and
is the largest traded currency in the world. It is widely preferred as the reserve currency of
the world with a 62.2% share in global currency reserves. The significance of the USD
increased after the Second World War as the UK and the German currencies lost their value
due to economic instability. The USD is considered as a safe haven currency globally. The
Federal Reserve is the central authority for taking policy decisions on the monetary front for
the USD.
The US economy is the largest economy in the world with a GDP of over USD 15 trillion and
GDP growth rates in the range of 1% – 3%. The industries in the US are technologically the
most advanced in the world.
US Macro Economic Data
US Government Debt to GDP
The US Government Debt to GDP showed a steady rise in the percentage of debt with
respect to the GDP of the US economy. The debt has risen to 101.6% of the GDP in the
year 2013. The US Government Debt averaged 60.28% from 1940 to 2012. Government
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debt as a percent of GDP measures the ability of a country to make future payments on its
debt, thus affecting the borrowing costs and government bond yields.
US budget deficit has fallen from over USD 1 trillion to levels of USD 470 billion over the
2009 to 2014 period. The falling budget deficit has been brought about by an improving
economy leading to higher tax revenues. Sustained fall in budget deficit would help the US
government controlling its overall debt.
US Current Account to GDP
The US Current Account to GDP shows an encouraging trend from 2006 to 2014 as the
deficit has reduced from 6.5% GDP to levels of 2.6% of GDP as of first quarter of
2014. Increased production of oil in the US on the back of the Shale Oil revolution has
helped the US in reducing its oil imports leading to a falling current account deficit. Read
our analysis Shale Oil Dynamics and US Oil Production.
US External Debt
The above chart shows the country wise debt holdings for the United States of America. China has
the largest holding in the US debt at USD 1.275 trillion followed by Japan at USD 1.083 trillion.
The Federal Reserve Balance Sheet
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(Source: Federal Reserve)
The Federal Reserve’s Balance Sheet shows increase in the amount of liabilities after each
Quantitative Easing (QE) as shown in the chart above. The amount stands at USD 4.4 trillion
as of July 2014.
The Unemployment Rate
Unemployment Rate in the United States decreased to 5.6 percent in December 2014 from
7.60 percent in June 2013. US unemployment rate has come off from highs of 10% seen in
October 2009. The average Unemployment Rate in the US was 5.83% from 1948 to 2014.
The decrease in the Unemployment Rate signals a recovery in the US economy with revival
in job prospects in the economy.
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Registered Office: 13/701 NRI Complex, Nerul, Navi Mumbai - 400706. Mobile: +919819770641 E-mail: [email protected]