In a Dim U.S. and Global Financial View: A Shining Moment of the Dollar

The U.S. currency is now reviving after 6 long years of steady descent causing fears of a global recession and a meltdown in financial markets.

The gauge of the dollar’s worth against the currencies of major trading partners is the New York dollar index which is now up due to the unpleasant global economic picture and the shift of investors from risky assets such as stocks, corporate bonds and property to safe U.S. Treasury securities.

Taking On Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500)

Rebecca Patterson, the global head of foreign exchange at J.P. Morgan’s Private Bank, said that the speed of the rally has been really striking. The currency steadily rose in recent months, though most of the gains have come during the traditionally volatile months in currency markets, August and September.

Even so, the shift is remarkable because it comes as the U.S. economic outlook seems to dim by the hour. House prices are tumbling, joblessness is rising and the wheels are coming off the financial sector.

The resurgence of the dollar is highly significant as the nation prepares to undertake additional obligations in support of mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500).

Recently the government successfully nationalized the mortgage business through acquiring preferred stock in Fannie and Freddie in order to subdue worries from the creaking housing market. In effect the shares in firms such as Lehman Brothers (LEH, Fortune 500) and Washington Mutual (WM, Fortune 500) have declined.

The weakening demand of commodities such as oil, gold and grains led to a drop in the prices of the said commodities. Central bankers in New Zealand made a deeper-than-expected cut in their policy rate in a bid to steer clear of recession since the national output of Europe, the U.K. and Japan declined.

Dollar’s Shining Moment

According to Ashraf Laidi, CMC Markets currency strategist, the dollar has taken on the role of a safe haven currency after U.S. authorities carried out the most measures in stemming the deepening slowdown.

And according to data from the Federal Reserve Bank in New York foreign central banks, who became net sellers of agency securities, augmented their acquisitions of Treasury Bonds.

It is crucial that capital flows remain strong since the U.S. needs to import billions of dollars in overseas capital every day.

If investors will begin to see how the parts of a rebalanced global economy might fit together, good news beyond a bounce in the dollar might finally be in sight.

Economist Jim Griffin wrote in the ING Investment Weekly that when U.S. financial limits is approached, it is only then we can figure out the way the world works and maybe uplift the brooding market mood.