While US treasuries continue to rally amid euro-sovereign contagion, currency markets reveal a more accurate picture of global investors’ attitudes towards US assets and economic governance.
Steven Englander, global head of G10 foreign-exchange strategy at Citi in New York, explains that foreign owners of US assets face greater risks than domestic bondholders, because the fiscal debate is conducted in US domestic political terms. This is a game conducted by the Federal Reserve in which foreign investors hold few cards.
Collateral damage
Furthermore, the US government’s lack of fiscal reform at a critical moment could cause more serious and permanent collateral damage to international investor confidence.
“Foreign investors want to see US macro policy normalized. The last thing they are looking for is another unorthodox tool added to those the US is already using such as QE1, QE2 [quantitative easing] or zero rates. The US pattern of economic governance is adding to dollar downside much more than any dollar upside,” says Englander.
Under pressure from anaemic US growth and unflattering global interest-rate differentials, the dollar has recently fallen by around 5% versus a G10 basket containing the euro, yen, sterling, Canadian dollar, Swedish krona and Swiss franc, as measured by the Intercontinental Exchange’s US Dollar Index.