With the dollar falling by 20% last year, investors may look to the euro as the new safe haven currency
This week marks the calm before the storm. According to best guestimates, the US will launch its war on Iraq by 15 March, if not a little earlier. The conflict will last a laser-like eight weeks, if the pugilists are to be believed, or anything up to three years, if you admit to being more cautious. So these days may be the last clear opportunity to settle portfolios for the next few months.
Usually, at this time of year, the Isa marketing machine is getting into full swing, with IFAs doing the rounds of clients persuading them into the season's must-have fund. The institutions have difficulty hiding their glee and satisfaction at the millions pouring in. But how desperate must you be when your USP is that the structure still offers tax breaks on capital that survives the plunging stock markets?
Dismissed in the boom years, cash Isas are enjoying a revival. Investors have realised that financial institutions quickly pass on interest rate cuts to savings accounts but are slower to act on mortgage rates. Smile, the internet bank owned by the ethically guided Co-operative Bank, actually cut its savings rate by 0.5%, double the central bank cut. Smile, indeed, or snarl. But If you have to be liquid, why stick with sterling? The problem is that other currencies do not exactly inspire confidence. Usually, in uncertain times, investors flock to the US dollar. The greenback, and consequently the US economy, has done quite nicely out of economic crises. Remember 1992, when Brazil began to unravel in the way that Argentina recently demonstrated was still possible? The number crunchers now estimate the US dollar may have been boosted by over 10% in that period.
Brazil was followed by the Mexican default in 1995, which signaled the beginning of the end of the last but one investment bubble ' emerging markets. The fallout began to affect Asia, which had its own debt crisis in 1996, driving investors back into the open arms of mainstream markets. The ripple from Asia reached Russia in 1998, prompting another major debt default. Those who bought US stocks, especially in the rising technology sector, felt thoroughly vindicated.
In 1999, the euro arrived. But even before 'Old Europe' became a pejorative phrase in the US, the currency underwhelmed Wall Street. In the 10 years from 1992 to 2002 some US$1.2 trillion of foreign investors' money flooded into the US. This had nothing to do with US economic policy. Indeed, the Federal Reserve tried several times to cool rampant spending, but consumer credit exploded by 119%, while company debt rose by 95%.
How many times have you heard the mantra that the US is richer than any other nation on earth because it is cleverer and more productive? In fact, the long US bull market has been largely due to international investors who have allowed the country to live beyond its means. But the music has stopped. Money may not yet be leaving the US but it has stopped pouring in. US consumers may not have noticed, but the dollar has: it is down 20% in the last year.
If the dollar is no longer the world's safe haven currency, what is? Stifle the sniggers, it may be the euro. According to the International Herald Tribune, Russian kidnappers (a sector, it must be admitted, with no benchmark) are now demanding ransom money in euros rather than dollars. If we can just get this Iraq business out of the way, we could be in the Eurozone by year-end.
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