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The buck gets a boost amid global turmoil

October 24, 2008|Tom Petruno | Petruno is a Times staff writer.

The U.S. gave the world the worst financial crisis since the Great Depression.

In return, global investors reward us by dumping their own currencies in favor of the dollar.

Make sense?

Although the greenback fell slightly Thursday after weeks of soaring against most of its major and minor rivals, the world's hunger for the U.S. currency shows no serious signs of abating. The euro plunged Wednesday to a two-year low of $1.285, from $1.313 on Tuesday. The dollar reached a three-year high against the Canadian dollar and the Brazilian real, and a five-year high against the British pound.

It would be a great time for Americans to vacation abroad -- if they weren't worried about losing their jobs in the recession. At a minimum, the dollar's trend should help stabilize or push down prices of imported stuff we buy.

The robust dollar is, in large part, more fallout from the credit crisis. Fearing a deep global recession, investors worldwide continue to reduce risk in their portfolios, such as by dumping emerging-market stocks and bonds and cashing out of commodities. (Oil fell below $67 a barrel Wednesday.)

The dollar -- particularly in the form of U.S. Treasury securities -- wins by default: We may be leading the way into recession, but the buck still is considered a haven because there is more faith in the U.S. Treasury than in any other government entity with the ability to print money.

In Europe, by contrast, "I think there's a fear that [governments] may struggle to finance their commitments to support the banking system," said Daniel Katzive, a currency strategist at Credit Suisse in New York.

What's more, many global investors used borrowed money to boost their portfolio bets in recent years. Those loans are being called in by lenders, or pared back by choice. If the debt was denominated in dollars (and much of it was), the result is a "short squeeze" -- a rush to find dollars to repay what was borrowed in the currency.

"A lot of this is deleveraging," says Sophia Drossos, a currency strategist at Morgan Stanley in New York. "People are selling assets and paying back the loans they used to buy them."

That process also is pulling money back to Japan: The yen is one of the few currencies rising against the greenback. One dollar now is worth fewer than 98 yen, down from 105 in mid-September and nearing a 13-year low.

What would weaken the dollar against the rest of its rivals?

Once the deleveraging process is complete, that segment of demand for dollars should ebb. And in theory, low U.S. interest rates eventually should reduce the appeal of Treasury securities.

But we may be a long way from the point at which investors will focus again on the return on their money, as opposed to the return of their money. Until then -- hail the dollar!

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tom.petruno@latimes.com

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latimes.com

/moneyandco

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