Record budget deficits, a U.S. national debt piled as high as the Sears Tower in Chicago. And the dollar . . . rises. Go figure.
Actually, it does figure, when you consider risk aversion. And investors, given the pronounced U.S. recession and near-zero global GDP growth, need to consider risk aversion, which means putting some money in U.S. Treasuries or their equivalent, says economist David H. Wang.
"We're in the first, synchronized global recession in decades, with considerable fear regarding the amount of toxic assets in the U.S. and abroad, so that has caused a flight of money to U.S. Treasuries, which benefits the dollar," Wang says. "Investors big and small continue to look for safe places to park their money, and there aren't too many safer places than U.S. government bonds."
The dollar strengthened about one-half cent Friday to near three-year highs versus the euro and British pound, to $1.2690 and $1.4270, respectively.
U.S. government: Money at bargain prices
For investors, it means Treasury rates will remain very low -- well below what they would be in a typical market, given the U.S.'s $11 trillion (and rising) national debt, according to Wang. That reduces the interest paid to those who use fixed income securities as an income source, but it's good news for the U.S. government and taxpayer: it will cost the U.S. less to fund its budget deficit and national debt.
Further, no other nation in the world could experience a recession, financial crisis, a gargantuan deficit, and see its currency rise. This is due to the U.S. dollar's reserve currency status, which is driven by many factors, including free markets, the Bill of Rights, the rule of law, and the American people themselves.
"In spite of the U.S.'s large national debt, major capitalization and economic repair tasks ahead, investors are saying, 'This is the most appropriate and safest place to be with my money right now.' The dollar is a safe haven." Wang says. "This reflects the belief that the United States still has enough resources to solve both the financial crisis and recession, and to a certain degree it also reflects investors' confidence in the American political system and the inherent fairness of the American people."
Analysis: Look for the dollar to continue to remain stable on flight-to-safety and risk aversion factors. However, once the global recovery starts, some of that money will move to higher-returning investments, and U.S. interest rates will likely rise then, which underscores the need for the U.S. to cut its budget deficit in the years ahead.
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