At 10% of GDP‚ the US annual budget deficit is greater than that of most eurozone states. The overall debt mountain continues to rise‚ and has now reached the unbelievable figure of 15 trillion dollars. The politicians in Washington appear unable to put aside their own interests for the benefit of their country. And yet investors are flocking in droves to the US dollar as the threat of the euro’s collapse looms ever larger.

On 5 August 2011, Standard & Poor’s stripped the United States of its AAA rating. Politicians reacted with indignation, analysts queried the ability of  the US to finance itself, and the media surpassed themselves in painting doomsday scenarios. In the meantime things have returned to “business as usual”. The financing costs of the US have fallen thanks to a sharp decline in interest rates, and the media have a new target on which to feast in the form of the eurozone.


Lack of alternatives to the greenback

But to explain the appeal of the dollar by the weakness of other currencies alone would be unfair as well as myopic. Over the last few weeks we have seen yet again how liquidity in securities trading dries up rapidly as crises unfold. But it is precisely during such crises that being able to trade freely is so crucial. And US Treasuries are the only investment that can currently be traded in large volumes. This characteristic continues to make them a key asset class for central banks – the world’s largest traders right now – and explains why the US dollar is the leading reserve currency.


Dollar also supported by fundamentals

Recent economic developments also favour the dollar. While Europe is fighting to avoid being dragged back into recession, the US economy has put the weak phase of the summer behind it. True, there is no economic boom in the offing here, but the US is still likely to generate solid growth in the future. And slowly but surely, this is feeding through into the labour market. The unemployment rate has now fallen to 8.6%, much higher than before the financial crisis but lower than a year ago. If this trend were to persist, the Fed would probably refrain from implementing another bout of quantitative easing, and this would strengthen the dollar further.


US dollar to remain strong

For the time being, the US dollar has abandoned its longstanding downwards trajectory. We have therefore revised our forecast for the dollar upwards slightly.


Forecast 3 Months
USD/CHF: 0.88-0.98 EUR/USD: 1.30-1.40

Forecast 12 Months
USD/CHF: 0.88-0.98 EUR/USD: 1.32-1.42

 
Hyposwiss Private Bank Ltd.

Hyposwiss Private Bank is a Swiss private bank with 120 years experience. We offer our private customers a wide range of services in the areas of private asset planning and asset management. Specialised in individual asset management, we are the private banking competence centre of the St.Galler Kantonalbank Group. Hyposwiss Private Bank Ltd. currently has 162 staff and manages customer assets of 9.6 billion Swiss francs.