Buy Dollars to Flee Crisis? Maybe NOT!
April 02, 2002 04:12:00 AM ET
By Anchalee Worrachate
SINGAPORE (Reuters) - The raging conflict in the Middle East is creating a dilemma in foreign exchange markets over whether the U.S. dollar is the safest harbor for investors worried about the potential economic impact of the crisis.
On Monday, as Israeli tanks rolled into Palestinian-ruled areas of the West Bank, investors were quick to jump out of the U.S. dollar, the traditional port of first call in times of conflict or economic stress, into the Swiss franc, an alternative safe haven.
The U.S. currency clawed back ground on Tuesday as a dithering market decided rising oil prices would probably hurt huge oil importers such as Japan and the euro zone, where the European Central Bank's inflexible inflation target leaves it exposed to any short-term energy-related surge in prices.
Analysts said the most pressing question being asked in the market was whether the Middle East violence was likely to escalate to the point that it could derail a U.S. economic recovery.
``It depends on how the U.S. is drawn into the conflict. If it's plain vanilla Middle East tension, then you can expect people to buy the dollar, buy oil, sell Hong Kong forwards and the yen, for example,'' said Claudio Piron, the head of currency strategy at Standard Chartered in Singapore.
``If the U.S. involvement in the conflict becomes deeper and the situation gets messy, it's likely people will diversify and get out of the dollar. The problem will raise questions about the sustainability of its huge current account deficit.''
The staggering size of the U.S. current account deficit -- more than $400 billion -- means the U.S. needs to attract more than $1 billion a day to fund its capital shortfall and maintain the stability of its currency.
So far, the United States has had no difficulty meeting the challenge even when it faced recession, thanks to its robust equity and bond markets.
``This is not an issue anyone will raise during the good times. But be careful, once a pin drops, there could be a stampede,'' said a senior forex dealer at an Asian bank in Singapore.
``That said, I still think the dollar should continue to be in favor despite the Middle East conflict because there are lots of positive things being loaded up into the pipeline that will cause a strong rebound in the U.S. economy.''
Moreover, some analysts believe calls from some Arab nations to use oil as a weapon against the West would be hard to carry out because of their fragile economies.
The world's biggest oil exporter Saudi Arabia, for example, has been running a current account deficit for the last 17 years and has barely enough oil revenues to meet immediate budgetary needs.
But other analysts cautioned that a ''when-in-doubt-buy-the-dollar'' mentality might not be the best option at this point.
``The degree of risk and uncertainty in the Middle East is higher now than it had been previously,'' said Clifford Bennett, senior currency strategist at BNP Paribas in Singapore. He recently made a call to buy the Swiss franc, which is up one percent against the dollar since last Thursday.
``Over the weekend, Iraq and Kuwait becomes friends again. Basically, the message to the U.S. is, 'Hands off Iraq'. What that symbolizes is the Arab world is more angry and more upset than it has ever been previously about the U.S. foreign policy on Palestine,'' he said.
Bennett said the conflict is taking place as the United States' financial market status is diminishing due to its perceived foreign policy shortcomings in the Middle East, huge current and credit account deficits, and high-profile corporate failures.
``In the late 90s, people would buy anything American because of its brand name status. Now M&A flows have fallen and portfolio flows are appearing to be more balanced between the Europe and the U.S. The current crisis could hurt sentiment toward the U.S. and that could cause people to go for the European currencies to play it safe,'' he said.
© 2002 Reuters |
