Opening Position
August 2009
The recent US financial crisis has led many to question the status of the US dollar as a world reserve currency. The instability of domestic economic conditions and the lack of signs of an economic recovery in the near future will, without doubt, have an impact on the value of the US dollar. But if the dollar were to lose its status as a reserve currency, what would take its place?
Matters are not really much better in Europe, where we have seen the Swiss National Bank intervene significantly to keep the Swiss franc weak. In June 2009, the European central bank announced that it would pump 442 billion euros into the banking system. And in the US, the Federal Reserve wants to keep US bond yields low, which means we shouldn’t expect a rise in interest rates any time soon. We know that interest rates can’t be kept at zero forever, but given that economic fundamentals are far from rosy, it may be too early to start raising rates.
We are seeing some strength in the emerging market economies, and these countries could be the ones that jumpstart global growth. It is the growth of these emerging market economies that led to the rise in commodities until the early part of 2008. What we are seeing now could very well be a pullback since demand for commodities, especially from China, remains strong.
Needless to say, we are going through an interesting time in the financial markets. It’s as if we’re at a point where we don’t know which way things will go. And things could very well stay this way for a while.
But the good news is that the equity markets have shown signs of recovery, albeit modest, since March 2009. As we know all too well, however, the markets don’t continue going up forever; we can expect some pullback in the near future. But how much of a pullback remains to be seen; we could see a testing of either the March 2009 or November 2008 lows. Although this may hurt those who have already entered the equity markets, if the markets bounce off of those lows, it would be enough to convince me, at least, that we have seen the lows of this ugly bear market. So keep an eye on those emerging markets as well as global markets for any signs of economic recovery.
Jayanthi Gopalakrishnan, Editor