Looking out over different time frames, we can see different fundamental concerns weighing on the dollar’s health. Through the short-term, currency traders are almost completely concerned with risk appetite. The US dollar’s benchmark market rate (the three-month Libor) has leveled off; but it is still at a discount to its Japanese and Swiss counterparts. With policy officials vowing to keep the overnight rate at its low levels until the middle of next year, rising carry interest is pegging the greenback as a funding currency. However, the Fed’s loose monetary policy will likely be reigned in soon; and when they do move it will likely be at a relatively quick pace. Through the medium term, the dollar’s troubles lie with the economy’s ability to recovery combined with the government’s ability to remove stimulus. This will be a delicate balance all on its own; but to support dollar strength, the country will have to perform this tight wire act more quickly than its global peers. Finally, we have the long-term implications for the US currency. The financial crisis has exposed the flaw in having a single reserve currency and disconnected policy has amplified the world’s desire to revert to a more stable alternative. The dollar has dominated the FX landscape since the pound lost favor in the early 1900’s. Is there a viable alternative to the buck?
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