Europe less attractive during crisis
THE US DOLLAR has surged during the financial crisis, despite the fact that the crisis originated in the United States and its banks are hard hit. The graph shows how the dollar has strengthened from close to US$1,60/euro not too long ago to around $1,25/euro.
It’s emerging market currencies such as the rand that have taken the biggest strain against the greenback.
The US dollar has strengthened against the euro as investors liquidate investments bought at a time when interest rates heavily favoured European assets. The International Herald Tribune (ITA) reports that analysts say institutional investors faced with losses suffered on US investments are also liquidating overseas assets to meet the margin calls. Those asset sales add to the dollar’s strength, as foreign currencies are sold for dollars.
The IHT says central banks everywhere have moved to an emphasis on growth and away from a focus on inflation. As a consequence, investors expect more and faster interest rate cuts in Europe, bringing them closer to those in the US and Japan, which would make investing in short-term European assets less of a draw.