When European sovereign debt woes surfaced later that year (and in earnest in early 2010), the dollar surged once again… but that time it was a little different.
Sure, the dollar rallied against the euro and other European currencies… but gold rose as well. I remember writing about this last year, suggesting that the simultaneous rise in both the dollar and gold indicated the market’s changing attitude towards what it considered a ‘safe haven.’
Clearly the dollar was beginning to fall out of favor.
Fast forward to today. Mubarak. Gaddafi. Khalifa. Al Said. Ben Ali. Etc. There is no shortage of turmoil right now… yet we are seeing the dollar get clobbered while gold, silver, and smaller currencies like the Swiss franc rise. This represents a major shift in the way that the market views risk.
It’s true that nothing goes up or down in a straight line… but long term, the market is telling us that investors are washing their hands of the dollar as a safe haven asset.
So what happens from here?
In the long run, the law of one price will prevail; the US dollar cannot become so cheap relative to other currencies that a multimillion dollar home in Malibu only costs the equivalent of six month’s wages in Switzerland… or that a new Corvette equals the price of an electric bicycle in Singapore.
Foreigners will swoop in and mop up US inventory long before that happens, not to mention foreign governments will manipulate their own currencies in order to avoid missing out on a 300 million-strong consumer market.
We’re already seeing this now as the ridiculous game of international capital controls tries to masquerade as a free market. I suspect the regulatory environment will only worsen as the political lemmings follow one another off the cliffside.