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Month and quarter ends are always interesting times in the market, with all kinds of capital flows offering the potential to move markets. This time of year in particular we also have Japanese fiscal year end to add to the mix. As we near the finish this quarter, though, I’d like to take a look at what might be coming our way in the next one. Specifically, I want to take a look at the research I’ve done on forex seasonal trading patterns to see what’s ahead for the market.

April is not a very strong month for the USD. In fact, statistically it has been one of the worst. Looking at data back to the early 1980s, we can see that in general terms the dollar has fallen about 60% of the time and lost about 0.5% in value against the other major currencies (I’m not specifically using the USD Index here, but close). The pattern is even stronger since the introduction of the euro. Going back to 1998, the dollar has been down 61.5% of the time for an average annual loss of 0.72%. Only December has a more negative pattern.

One thing that is worth noting, though, is that we would expect to see a positive transition over the next few weeks. We can see that on the chart below, which looks at the 1-month forward returns on a week-by-week basis (measuring 7-day periods, not calendar weeks).

The featured area is the next 4 weeks, with week 14 representing April 1 to April 7. We can see we start April off in a period of strong negative indications for the dollar, a pattern which began a couple weeks ago. That shifts from negative to positive as we get into the middle part of April, though.

As for what to play on the other side, the pound is the major currency with the best April statistics. The GBP been up in general terms nearly 70% of the time during the month since the euro launch for an average 0.45% gain.

We would therefore expect GBP/USD to have a strong positive bias heading into April and that is indeed the case, as the weekly returns chart shows.

Notice here, though, that the pattern shift is much more swift, if also more abbreviated.

This seasonal bias information isn’t a suggestion to go out and get long GBP/USD, though. These biases are just that, biases. There are no sure things and even when the market does move in line with tendencies it can do so in a very choppy fashion. As such, you would likely be better off using this information to help shade your trading – like perhaps being more aggressive on trades you do in the direction of the bias and less so against it.

It’s all about putting the odds as far in your favor as possible. This sort of data, if used prudently, can help you do that.

Now, as to what this means for the global markets…

That’s a bit trickier now that we aren’t seeing the same market patterns that we were seeing in the past whereby the dollar and stocks and interest rates all had pretty well-defined relationships. As a result, we need to be aware of whether the market is in “risk” mode whereby stocks and commodities are rising and the dollar is falling, or in the recent mode whereby the dollar and US Treasury yields have moved together, mainly as a function of whether the market sees more QE coming from the Fed. I personally don’t expect anything like that, but Bernanke has done is best to keep the markets thinking he’s inclined to maintain an accommodative monetary policy and doesn’t want to see long-term rates rising too much.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

With the start of 2012 comes the start of the strongest “seasonal” trading pattern of the year for the US dollar. That would be the one for the month of January. Going back to 1982, the first month of the year has been up 2/3rds of the time, averaging a gain of 0.89%. For those who have a statistics bent, T-Test analysis indicates this is significant at a 97% confidence level. (It should be noted that I’m not actually talking about the USD Index here, but rather an equal weight index calculated using the USD exchange rate against the other majors, though indications suggest the results for the USD Index are quite similar).

And for those who think these sorts of patterns degrade over time, consider the fact that the USD has been up 9 out of 13 Januarys since the launch of the euro in 1999, with a very similar average monthly change. This figure isn’t as statistically significant because it includes fewer observations, but it’s meaningful never the less.

Why is this the case?

I can’t give you a definitive answer, as I’m not involved in that side of the business, but I can venture what I think is a good educated guess. It likely has a lot to do with the corporate capital flows as US multi-nationals repatriate overseas earnings as they close up the books for the year gone by. There’s been a lot of talk in recent years about money sitting overseas to avoid US taxation, but that’s likely overstated.

So why is this important?

Given the recent negative correlation between the USD and stock prices and interest rates, the expectation of a rising dollar during January would tend to suggest weaker stocks and lower yields. Just keep in mind, though, that correlations change. As the chart below shows, the correlation between the USD Index and the S&P 500 (lower red plot) has been moving toward 0 of late and actually got well into positive territory a couple times in 2011.

The other risk management consideration is that a strong seasonal pattern is no guarantee. The dollar may have been up 20 out of 30 months, but that means 10 out of 30 it wasn’t, so caution is always warranted. As with other markets, forex seasonal patterns are good for biasing, but risky to use outright.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

The S&P 500 broke down below its August lows on Monday. That was something a lot of folks were not expecting to happen (including some in my own office). As such, it begs the question of how far the market may yet go, especially with all the talk now about how it’s officially reached bear market status based on a 20% decline from the most recent highs. This also ties in with the dollar given the negative correlation between the two markets. So with that in mind, let’s take a look at a couple of potential indications of what may yet be to come.

First we have the weekly S&P 500 chart. It could be said that the consolidation we saw following the August lows which saw the index move around in about a 1120-1120 primary range was the building of a bear flag pattern. If we go along with that then Monday saw the expected trend continuation on the new lows, meaning we should be able to derive a basic target based on the height of the flag poll. The first red box on the chart encompasses the poll. The second one plots that area from Thursday’s peak to provide a conservative projection of about 970 for the index.

It’s worth noting that the 2010 market low is not far away from where the flag projection comes in. That gives us a pretty good expectation for support to develop in the general zone around about 1000.

For me the important leading indicator is the German DAX, which has already taken out its 2010 lows. The sovereign crisis over there is obviously a major motivator in the selling seen thus far. It’s been interesting to observe, however, that the DAX has not made new lows in line with those of the S&P 500 in most recent trading. The German market successfully tested support just below 5100 a couple weeks ago and hasn’t re-challenged that level on the latest downturn yet.

Significant in chart the above is the volume pattern of late. Notice how the volume has not been as strong on the down days as much as was the case earlier in the move. At the same time, there’s been some uptick in volume on the positive days. If that pattern holds and we see the DAX form a bottom here it would be a very good development for the global markets, and likely a negative for the dollar.

Note in the daily EUR/USD chart how the DAX actually led the euro lower by starting to break down late in August. Could it also be leading by potentially putting in a bottom?

The DAX bottom obviously works against the S&P reaching the bear flag target, but I’m not sweating that. My suspicion from looking at the monthly chart is that the market is due for a bounce in that timeframe, one which could rally the index back into the 1200s. Beyond that though would be a challenge based on the current situation. The sell-off from the year’s highs has been very aggressive, which bespeaks a weak market.

I think the best case scenario for stocks is a consolidation centered on about the 1200 level as we see the volatility come down, narrowing the monthly Bollinger Bands in preparation for the next meaningful trend move. That’s looking well down the line, though. In the nearer term, watch to see if the DAX holds its bottom. If it does, stocks will probably post a decent rally, putting the dollar under pressure as the “risk-off” trade is unwound.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

Investors who obeyed the old stock market maxim, “Sell in May and go away,” have side-stepped the vicious downturn in equity prices through the summer and early-autumn.  Indeed, global stock market indices peaked on the first trading day of May and subsequently dropped by almost 20 per cent, as a sharp slowdown in economic activity across the developed world, alongside the never-ending euro-zone sovereign debt crisis, shook investors’ bullishness.

The major market indices have already endured a near bear market decline, as a seemingly relentless stream of disappointing news has been digested, so it is reasonable to ask whether it is safe to reverse course and establish long positions.  Indeed, the trusted market adage advises investors to throw caution to the wind and, “come back on St. Leger day,” the date of the world’s oldest classic horse race.  The St. Leger Stakes was run at Doncaster last Saturday but, the historical evidence – coupled with reliable leading indicators – suggests that investors may well be better-served to remain on the sidelines for now.

The month of September has typically proved difficult for investors and, it is the only month to have generated a negative mean return through time.  The mean return has been minus 0.25 per cent since 1802, and the seasonal effect has shown little sign of becoming less pronounced in the recent past.  Indeed, one dollar invested in the stock market only in the month of September since 1971, would be worth less than 70 cents today or just 12 cents in real terms.

The historical record demonstrates that the economy and financial markets have been particularly crisis-prone this time of year, such that cash has typically generated higher returns than the stock market across the months of September and October.

Historical crises that struck this time of year include the Panic of 1819, the first major financial crisis in the United States, the Panic of 1857, which was triggered by the failure of the Ohio Life Insurance and Trust Company, the Panic of 1873 that followed the collapse of Jay Cooke Company, the run on the Knickerbocker Trust and the subsequent Panic of 1907, not to mention the Great Crash of 1929.

More recent episodes include Black Monday in 1987, the United Airlines mini-crash of 1989, the 1997 attack on the Hong Kong dollar, the terrorist strikes on the World Trade Centre and the Pentagon in 2001, and of course, the Lehman Bros bankruptcy in 2008.

Those of a bullish persuasion will undoubtedly argue that the historical record is purely coincidence and thus, of little value to tactical decision-making.  That may well be true but, it is important to stress that recent market action has been accompanied by a whole host of indicators that give pause for thought.

First, both 10-year Treasuries and German bunds are trading at record-low yields below two per cent, which is simply not consistent with continued growth in the developed world.  The respective yield curves may well have a positive slope but, is important to recognise that the spread between short-term and long-term interest rates loses its usefulness as a leading economic indicator when short-term rates are close to the zero-bound.  The actual level of yields, at a five- to ten-year horizon, suggests that a recession in the euro-zone and the U.S. is imminent.

Second, the cost of corporate credit is rising and the recent widening of high-yield bond spreads from an average of 440 basis points in April to more than 730 basis points in recent weeks, warns of an impending downturn.  Indeed, a recession typically follows whenever the spread is sustained above 700 basis points.  This indicator did send a false signal in the latter of half of 2002 as an economic downturn did not subsequently materialise.  However, this did not protect equity investors who endured a devastating decline in stock prices.

Third, leading economic indicators such as copper prices are in the process of breaking down, while the demand for safe haven assets such as gold, the Japanese Yen, the Swiss franc, and even the U.S. dollar, is strong.  Furthermore, bank share prices are crumbling across the globe and funding costs are under pressure.  It is clear that stress is building throughout the financial markets and tail-risk is rising.

Mark Twain, the celebrated American author, quipped in his 1894 novel, Pudd’nhead Wilson that “October…is one of the peculiarly dangerous months to speculate in stocks.”  The truth of the matter is that both September and October have proved to be notoriously tricky for equity investors and, early indications are that the seasonal pattern looks set to be no different this year.  Tail-risk is rising as economic growth falters and the euro-zone sovereign debt crisis moves closer to the end-game.  Caution is warranted for now.

Originally posted on www.charliefell.com

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

As we mark its 10th anniversary, it’s clear that Sept. 11, 2001, continues to impact our country’s financial infrastructure. Here’s some perspective as well as our check-in on this week’s headlines:

The destruction of the World Trade Center back on that frightening Tuesday morning halted the markets, closing the New York Stock Exchange for four days. At the time, the U.S. was sliding off the bubble burst and was battling a recession from March 2001 to November 2001. Fast forward some years to the economic downturn of 2008 and the current crisis stamped by Standard & Poor’s downgrade of the nation’s AAA credit rating. The past decade’s fiscal rollercoaster has cranked to a higher level as jobs thwarted downhill. President Barack Obama took to the national airwaves on Sept. 8 in a televised speech, challenging U.S. lawmakers to enact a $447 billion package of tax cuts and new government spending that aims to stimulate a stagnant economy. As jobs have been butchered, so have hedge funds, especially as the worldwide economic chaos broils. Experts say several big hedge funds such as MLM Marco Fund are poised to face steeper losses before 2011 turns 2012. The Dow Jones Credit Suisse Core Hedge Fund Index dropped 3.76 percent as of Aug. 31 compared to a 3.1-percent dip in the S&P 500 index. Beyond our nation’s borders, the euro/dollar has slide into a six-month low, catalyzed by Greece’s slumping finances. The country last week faced a chance that it would run out of money in October when expected to fall short of 1.5 billion euros without the next round of help. What’s next?

• Market Moments Since 9/11, Forbes, Sept. 9, 2011
• EUR/USD Dips Into 6 Month Lows as Greece Faces Payment Freeze, Forex Crunch, Sept. 9, 2011
• Obama Challenges Congress on Job Plan, The New York Times, Sept. 8, 2011
• Forex Trading Volumes Near Record Levels, The Wall Street Journal, Sept. 7, 2011
• Big hedge funds are getting slaughtered, CNNMoney, Sept. 7, 2011
• U.S. Job Creation On Downward Trajectory, Business Insider, Sept. 6, 2011

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

I came across a poll being run by the folks at BabyPips today. The question is “Do you usually trade using hedging, i.e. making the opposite trade of the one that is currently open?” When I checked on the results this morning it showed that 29% of respondents responded that they do indeed use this sort of “hedging” (though I couldn’t see the actual vote count). This strikes me as a very high number, considering there is no economic benefit to this activity, and it can actually cost the trader money in the form of additional spread and carry costs. Maybe it’s a function of BabyPips being largely a newer trader oriented forum.

In retail forex, “hedging” has long been a hot-button subject. When the NFA ruled that US brokers could no longer use that type of accounting (“hedging” in this fashion is nothing more than a method of accounting), it created something of a firestorm among traders. My No More “Hedging” for Forex Traders post at the time remains by far the most commented one on my blog, with strong views expressed on both sides.

Needless to say, this sort of “hedging” will not be among the risk management subjects I will be discussing in Wednesday’s webinar. Instead, the focus will be on understanding volatility in the markets so one can be better prepared both for the risks implied and the opportunities it presents.

As a little bit of a taste, take a look at this chart.

What you see here is a comparison of daily volatility between the S&P 500 and the USD Index. The plots show the percent change for each market for each day, expressed as a positive figure (so a -1.5% would be plotted as +1.5%). As we can see, the stock market has moved around quite a bit more than the dollar has since the beginning of July, a time which encompasses things like the US debt ceiling debate and continued European sovereign credit issues. There may be a couple of sessions where the dollar was more volatile, but mostly the stock market moved markedly more than the currency index. That means on a strictly price volatility basis, the USD Index is quite a bit less risky than stocks. This is something investors looking for opportunities to diversify need to know.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

It’s hard to believe that we’ve already hit August. While summer is usually a quiet time to relax, the world of news media certainly hasn’t this past week. We kept a watchful eye on the outcome of the U.S. debt ceiling, but we also read headlines from around the world.

Here in the U.S., we’re all glued to the debt ceiling discussions as lawmakers continue debating on the heels of the Aug. 2 deadline. For traders, this event can be tricky to trade, but economists have pointed out some “winners” of the crisis including the Swiss franc, which appears to be a safe bet for investors due to its recent rise in value. Interestingly, President Barack Obama has called on U.S. citizens to tweet to lawmakers about raising the debt ceiling, believing that putting thoughts into tweets could put pressure on officials. According to a July 29 Commerce Department report, the U.S. economy is still showing signs of slowness as the gross domestic product grew 1.3 percent in the second quarter. Economists called the report “shocking,” saying slow growth, higher inflation and almost no consumer spending aren’t good-news indicators for the country. A weaker dollar also has been fueling sales, helping to increase U.S. companies’ second-quarter results despite having to pay for more expensive commodities such as raw materials. Abroad, Greece will default on debt after European officials approve a plan that will see bondholders foot part of the bill of a second bailout.

• Greece Will Default on Debt After EU Plan: S&P, Bloomberg, July 27, 2011
• Weaker Dollar Fuels Sales, Wall Street Journal, July 28, 2011
• Recovery Still Slow as New Data Show Little Growth, New York Times, July 29, 2011
• President Obama Calls On U.S. Citizens To ‘Tweet’ To Lawmakers About Raising Debt Ceiling, TechCrunch, July 29, 2011
• Five winners of the debt ceiling crisis, CNNMoney, July 29, 2011
• Debt ceiling: What they’ll be voting on, CNNMoney, Aug. 1, 2011

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

While cookouts and fireworks were certainly on our mind last week here in the US, we still kept an eye on the news. Here’s our roundup of top stories that we’ve read in between all of the celebrations:

After the Federal Reserve ended QE2 last week, many investors are now wondering what’s next for the U.S. economy for the rest of 2011. You can watch the experts debate what they think is next for QE2 by viewing our recent webinar. The good news, however, is that after two years of rapid decline, the dollar is now entering an uptrend, gaining against every major currency. In other news, the 2011 World Wealth Report that was recently released displays the staggering estimate that in 2010, 103,000 people out of 7 billion on the planet controlled 36.1 percent of the world’s wealth. Additionally, the report shows that hedge funds are no longer a favored alternative investment among the class of high net worth individuals. On the international front, the euro continues to weaken as interest rates rise, and China has begun to expand foreign exchange reserves using non-U.S. dollar assets – a sign that investment in the yuan may be on the rise.

• Picking the Brains of the Super-Rich, and Picking Up Tips, The New York Times, June 24, 2011
• The Dollar Rebound and What It Means to the Market, Seeking Alpha, June 26, 2011
• Euro Sustained in Widest Rate Gap Since ’09 as Greeks Vote, Bloomberg BusinessWeek, June 27, 2011
• China Moves Away From the U.S. Dollar; Invest in the Yuan, Seeking Alpha, June 27, 2011
• Why High Net Worth Individuals Are Running Away From Hedge Funds, Business Insider, June 30, 2011
• As QE2 ends, market debates Fed’s next move, Reuters, June 30, 2011

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

There’s a lot of talk these days about inflation and the impact of Fed policy on the dollar and the extension through the weaker dollar into higher commodity prices. Those looking to flame the Fed for its quantitative easing (QE) and generally loose monetary policy point to the falling dollar as the cause for oil going up above $100 and gold crossing $1500. While it’s certainly true that the greenback is lower (the USD Index has been as much as about 12% off it’s January peak), is the weak dollar really to blame for things like the rising cost of gasoline at the pump? Let’s take a look at what the charts have to say about it all.

First is a comparative chart of oil prices in dollars and oil priced in euros. The chart below covers the last year’s trading. The red line is the dollar value of a barrel of oil, referencing the left scale. The black line is the euro price of a barrel off oil (using front month futures), with that price on the right scale. Both scales are logarithmic so they express similar percentage moves between noted levels.

Now, the chart above doesn’t show relative % gains for oil in the two currencies. Those are +31.3% in USD terms and +22.6% in EUR terms. This is about what we’d expected given the relative performance of EUR/USD over that time. The point of the chart is that aside from wiggles where oil has done better in one currency than the other for a period of time, the pattern of the two lines is consistent. Oil has been moving higher in roughly the same pattern, regardless of what currency we’re talking about.

Now let’s take a look at gold (again front month futures). Once more, the red line is in dollar terms and references the left scale, and the black line is euro terms referencing the right scale.

In this case, gold is up 29.6% against the USD and 19.4% in EUR terms. Again, that difference can be explained by the change in EUR/USD over the last year, which is as it should be. Here, though, we see a lot more variation in performance. In dollar terms gold has been in a fairly steady uptrend with only two relatively minor retracements. In euro terms, however, the ride has been much more dramatic. Those periods when the EUR line diverges considerably from the USD line are periods when EUR/USD was selling off.

The chart below highlights the variation between how gold and oil trade relative to the dollar. It shows EUR/USD on the top with the correlation between EUR/USD and gold plotted in red and the one with oil plotted in green.

Notice how much choppier the green line is than the red. That means the correlation between oil and EUR/USD is much more fickle than the one between EUR/USD and gold. That said, however, oil has spent more time with a positive correlation (meaning rising oil with rising EUR/USD and falling oil with falling EUR/USD). The gold correlation has been much more balanced. In particular, the gold correlation has been more negative when EUR/USD is falling.

Now, correlation does not mean causality. It just shows how similar the movement patterns are without looking at why that might be. The way I would tend to read the above, however, is to say that rising gold is more a factor of what’s happening in the currency arena than rising oil prices. If you think about the implications of increasing money supply (which is what loose monetary policy is), then it makes sense. Gold is something with what could essentially be called a near fixed supply (very slowly increasing), so the more dollars there are the higher the value of gold per dollar (or any other currency). Oil has a different dynamic which is must more closely tied to economic considerations and geopolitics.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

Adam at Forex Blog has posted a critique of a Wall Street Journal article which discusses the pending loss of primary reserve currency status for the US dollar. The WSJ article, written by Barry Eichengreen, provides some very interesting information about the use of the dollar in global trade and financial transactions. For example, 85% of foreign-exchange transactions world-wide are trades of other currencies for dollars, and the dollar is the currency of denomination of half of all international debt securities, though in the latter case I’d ask what share of those debt securities are actually US government and related agency debt. Eichengreen believes, however, that the dollar will lose preeminence in the next 10 years.

Here are his reasons why:

1) Changes in technology mean exchanging less prominent currencies is less difficult and expensive than it was.

2) The dollar will soon have real rivals with the euro and Chinese yuan as the most likely candidates.

3) The dollar is at risk of losing its safe-haven status.

Let me address these points individually.

Changing Technology
I’ve been around long enough to remember when trading was done by telephone, not online. The technology has come along in leaps and bounds in the last decade or so. It’s not just better tech, though, that makes for lower costs. It’s also the fact that as forex market volumes have increased, and there’s become more competition in the brokering and dealing arena, spreads have come down significantly. That’s where you get the real cost savings.

It’s worth noting, though, that as transaction costs have declined, we haven’t seen any real marked shift in currency reserves. The dollar is still just about the same proportion of global reserves now as it has been for years. Technological improvements, as Adam notes in his piece, don’t really impact the supply and demand for a currency. Maybe just a bit on the margins.

Rival Currencies
There have always been rivals to the dollar for the top spot. When the euro was launched it was immediately viewed by some as a challenger for the crown (though obviously not by those who thought the Euro Zone would blow apart). Why else do you think the SWIFT code for the exchange rate to the dollar was chosen to be EUR/USD rather than USD/EUR? It’s been a dozen years now, though. As Adam notes, the euro suffers from being comprised of diverse parts. The debt and equity markets are fragmented among the constituent countries, countries with different credit and economic profiles. This makes for a much more shallow market for global investors to park their cash.

As for China, until the yuan is fully floated, it’s not even a debate. Even if the yuan were freely floating right now, it would still be a big ask for it to challenge the dollar for prime reserve currency status. The Chinese financial markets are in their infancy. It will take much more than just 10 years for them to get big enough to be able to support major capital flows. Even the Asian Development Bank doesn’t see the yuan as being a major factor in the currency reserve area. Adam notes that they forecast it will only account for 3-12% of international reserves by 2035.

What about the Swiss franc or the Japanese yen? Switzerland is too small an economy for the franc to ever be a major reserve currency. The Japanese economy is obviously a major one, but a key factor in being a prime reserve currency is having a balance of payments deficit. Japan does not have that (though things could change as the population there continues to age). This is also something that works against the yuan.

Loss of Safe-Haven Status
Eichengreen makes the point that recent economic and fiscal developments have caused the world to rethink the stability of the US markets and economy, putting the country’s ability to sustain its track record of paying its obligations in doubt. It’s a fair point. As Adam commented, though, this is old news, and is also of concern for the likes of the Yen and the Euro as well. The financial crisis didn’t only do damage to the US system.

I disagree, however, with Adam calling the yen a, if not the, premier safe-haven currency now. Yes, the yen absolutely benefits greatly when the markets go into flight-to-quality mode. That, however, is related to the carry trade where yen are being borrowed to fund investments in other currencies. Scared investors bail out of those investments, meaning they convert their money back to yen and pay off the loans they took out. This is not the same as capital flowing into yen-denominated securities the way it flows into US Treasury securities in a panic.

For all the issues with deficits and the like, the US Treasury market remains the place risk averse money goes. So long as that remains the case, the dollar will remain the primary safe haven currency. There may be times when other currencies step in to the spotlight, as the franc has done recently on geopolitical developments, but those are transitory periods and not the real panic situations.

The Bottom Line
The dollar is not going to lose its position at the top of the heap any time soon. That’s not to say there won’t be variation in its exchange rate values, because there most certainly will be. That’s also not to say countries and companies won’t diversify their holdings, because they will as suits their needs. It’s just that no major alternatives are going to be viable in the near future.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.