The Sub Prime Crisis: The dollar as a safe haven

(Ref: Wall Street Journal, August 20)

Whenever there is a crisis or a major instability in the global markets, the dollar attracts investor attention. As the saying goes, when the going gets tough, the tough get going. And the dollar is indeed a tough currency despite occasional see saws. During the Sub Prime crisis, with many market participants getting into serious trouble, the dollar has actually risen against the Euro. The yields the US government pays on its debt have fallen. The Wall Street Journal quotes Michael Dooley of the University of California at Santa Cruz: “The collapse of the yield on the 10 year treasury is probably the best indication of how quality is defined in people’s minds. The fact that the US still produces by far the best assets in the world, will as things settle down, be very good for the US.”

The fact that the ECB had to intervene with much bigger chunks of liquidity is an indication that the European markets are less able to adjust to rapid price movements than the US. The US has some structural problems to address but these are in a relative sense not all that daunting. Professor Catherine Mann of Brandeis University feels that the US current account deficit can be easily financed by investors unless an alternative investment emerges.