Many roads will lead investors to the dollar
July 19 (Reuters) -Many roads will lead investors to the dollar, which is likely to be supported whether financial markets are taking risk or shedding it.
As the world reserve currency the dollar is considered safe and is certainly more liquid and used more than any other currency. It will be purchased during any risk-averse period.
With stocks booming that isn't currently the case, but today the dollar is supported by a higher interest rate which is greater than those for other major traded currencies, but is also above those for several emerging nations.
This is a big shift from the past when other nations used to race to match steps taken by the Federal Reserve, and it has had big consequences.
Those pursuing easier monetary policy have seen their currencies fall sharply with a growing number of emerging market currencies approaching record lows.
The currencies of major nations are not immune, with Japan's yen at a record low on a trade-weighted basis this year and any extreme is best avoided.
Investors like to spread their risk, so there has been a trend to buy alternate currencies that are supported by interest rates like those in the U.S. but this creates issues.
Currencies preferred like the pound are much less liquid than the dollar, and its rise has become stretched , and bullish bets have grown very large.
This is happening when emerging market currencies that could spur risk-aversion are extremely weak. Should markets turn risk-averse, bets like those on the pound could rapidly unravel while the dollar is supported.
Should stocks rise even further as central banks ease monetary policy, then the dollar will continue to derive support as a popular component of carry trades that have been thriving.
Traders have slashed longs since the dollar index hit this year's high in April, lessening their restraint on the likely continuation of its rise.
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(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)
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