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Market will buoy dollar early next year

01 December 2008 14:05 (UTC +04:00)

While many analysts are increasingly wary of what happens to the dollar once a stress-driven preference for U.S. Treasury debt, deleveraging and capital preservation subsides, most agree the process has further to run, reports Reuters.
This essentially "forced" flow of money has meant the fate of the dollar has become closely linked to the intensity of the financial storm.
Take a punt on the timing of the crisis peak and you will also probably bet on the dollar cresting. With the Federal Reserve adopting an aggressive policy of quantitative monetary easing measures -- printing money in effect -- the dollar outlook for later in 2009 looks darker.
But as long as the financial world remains in turmoil, thereâ€™s potential for billions of dollars to be channeled back into U.S. cash as the scramble for dollars from both U.S. and overseas investors continues, albeit at a slower pace.
An analysis by Swiss bank UBS shows that the proportion of foreign assets held in the portfolios of U.S. mutual funds fell to 22.5 percent at the end of October from a peak of 26 percent a few months earlier.
"Repatriation has also been evident (in) the share of foreign assets falling faster than can be accounted for by exchange rate or global market changes. If investors remain risk-averse in coming months as we expect, the scope for further repatriation and therefore dollar support still remains significant," said Mansoor Mohi-uddin, head of FX strategy at UBS in Zurich.
Mutual fundsâ€™ foreign market holdings in the last decade bottomed at around 13 percent of their portfolios in early 1999 and in mid-2002, UBS charts show.
The total value of U.S. mutual funds is thought to exceed $6 trillion.
Michael Hart, head of FX strategy for Europe at Citigroup in London, estimated that U.S. investors put around $1 trillion into foreign assets over the past three years, suggesting thereâ€™s more leeway to bring money home.
The dollar surged around 17 percent against a basket of six major currencies DXY between the end of July and last week.
The bulk of that rally came after the collapse of Lehman Brothers in early September triggered a critical phase in the global financial downturn and a worldwide scramble for dollars to cover exposure to U.S. assets, meet dollar funding requirements or U.S. repatriation.
The latest official figures from the U.S. Treasury show that foreign investors plowed a whopping $143.4 billion into U.S. securities in September, the largest in nearly three years and easily enough to cover that monthâ€™s $56.47 billion trade gap.
But that flow was prompted by investors panicked into huge position unwinding by fears the financial system was close to meltdown, and massive selling of emerging market assets for relatively safe dollar-based investments.
Financial markets arenâ€™t expected to function anything like normal any time soon as the intended effect of the multitude of financial market programs and operations from global central banks will take time to emerge.
However, due to the macroeconomic reasons and monetary policy, the rising euro against the dollar on world markets manifested itself in Azerbaijan through bringing the euro down against the manat.
Given that the dollar surged around 17 percent against a basket of six major currencies DXY between the end of July and last week, the dollar increased 0.5% against the manat and the euro declined 20.1% against the manat in Azerbaijan.
Because the euro doesnâ€™t take so important part in Azerbaijanâ€™s economy and currency basket, the euro is more sensitive to global trends.
In terms of its impact on the national economy, the dollar appreciation in Azerbaijan to the level reached in foreign markets would have been more serious headache than the euro depreciation because the latter doesnâ€™t enjoy as significant role as the former.
From macroeconomic perspective, the sharply rising dollar is not beneficial for Azerbaijan.
Aftandil Babayev, Deputy Chairman of the National Bank of Azerbaijan, said the central bank has no intention to change its current soft exchange rate policy.