[lbo-talk] Why is the U.S. dollar regarded as a safe haven.

[Marvin Gandall]

Doug writes:
>
> On Oct 25, 2008, at 12:54 PM, Marvin Gandall wrote:
>
>> The dollar has been rising partly as a result of safe haven buying,  but
>> mainly because of demand for USD's by foreign companies which transact
>> business in the currency and by foreign borrowers who need to  service
>> their
>> US-denominated debt.
>
> Hedge funds are also unwinding their positions in foreign currencies,  and
> buying dollars. They're also buying yen to pay back loans taken  out
> because yen interest rates were low (and still are) and the  proceeds were
> invested in higher-yielding instruments in other  currencies ("the carry
> trade"). Those trades are being unwound,  pushing up the yen and driving
> down high-yield currencies.
==============================
The liquidation of hedge fund holdings, mainly forced by margin calls, has
driven the market down, and I can see where the dollar would be boosted
where they have been dumping foreign securities. But I don't see how the
carry trade figures in the dollar rise. If f anything, it would have an
offsetting effect in that higher-yielding Treasuries and other assets are
sold and dollars and other currencies converted into yen to close out
yen-denominated loans. This would seem to be confirmed by the yen being the
only basket currency against which the dollar has lost ground instead of
rising. It's gains have mainly come at the expense of the euro and other
major currencies.