Moves by the Federal Reserve to flood the world with US dollars are doing little to dent the dollar’s foreign exchange rate, bolstering the appeal of US assets at a time when the government needs the support of foreign investors the most.
The ICE US Dollar Index (DXY) has appreciated 13 percent from a record low in March 2008 even as the Fed kept interest rates at about zero and printed cash to buy $2.3 trillion (FARBAST) of Treasury and mortgage-related bonds, and is little changed since 1991.
The IMF said Dec. 30 that the US dollar’s share of global foreign exchange reserves rose in the third quarter by the most since 2008.
That long term stability shows America’s currency is a store of value and may help explain why the US is attracting record demand for the unprecedented amount of bonds (DEBPMARK) the Treasury Department is selling to finance a budget deficit exceeding $1 trillion.
Even though Standard & Poor’s stripped the U.S. of its AAA rating in August, investors see the nation as a refuge from slower global economic growth and Europe’s sovereign debt crisis.
“The safe-haven function of the dollar is still alive,” said Achim Walde, head of global fixed income and currencies at Deutsche Bank AG’s Cologne, Germany-based Sal. Oppenheim private-wealth manager, which oversees 3 billion euros ($3.9 billion). “The dollar will be strong in 2012,” he said in a telephone interview on Dec. 29.
The ICE Dollar Index, which tracks the US dollar against the euro, yen, pound, Swiss franc, Canada dollar and Swedish krona, rose 1.46 percent last year. That followed a gain of 1.5 percent in 2010, marking the first time it advanced two years in a row since 2000 to 2001.
The Dollar Index weakened 0.5 percent to 79.916 at 9:43 a.m. London time. The gauge is up from 70.698 in March 2008 and compares with 1991’s low of 80.34.
The US dollar’s foreign exchange rate appreciated 1.11 percent last year, the most after the Japanese yen’s 5.5 percent climb among 10 developed nation peers indexes. The indexes show that since 1975, only the Japanese yen and Swiss franc have done better than the American dollar.