The dollar has lost ground versus the world's other major currencies, amid this latest round of write-offs, bankruptcies and mortgage-asset-related stress on Wall Street, but the greenback has not plunged. In fact, the dollar is off its lows registered early Monday.
In early Tuesday trading, the dollar rose about a half-cent versus the euro to $1.4198, 1.5 cents versus the British pound to $1.7854, and a half-cent versus the Swiss franc to $1.1101. However, the dollar fell about 1 yen to 103.68 versus Japan's yen.
Themes: flight to quality, de-leveraging
Economist David H. Wang told BloggingStocks Tuesday the dollar's recent track displays two tendencies: a flight to quality and an unwinding of the carry trade -- i.e. a global de-leveraging.
"Although the U.S. Government and taxpayers are likely to spend more to deal with this financial crisis, and that implies more dollars in supply and inflation, institutional investors fear a decline or collapse in stock markets around the world, and are piling into the dollar," Wang said. "That is offsetting the dollar-weakening-effect of more U.S. Government spending. Essentially, it is flight to quality, so far."
In addition, Wang said the yen's rise "is a clear indication of de-leveraging." He said the mantra now is "get out of leveraged-based investments, raise cash, and put some cash it in your home currency, some of it in dollars, as a hedge."
During this decade's global finance boom, which now appears to have started to end in August 2007 with the start of the bursting of the U.S. housing bubble, institutional investors routinely borrowed the low-interest yen and invested it in higher-return assets overseas. That trend "has now reversed, and with skepticism building about the ability to deploy money productively, institutions are ending their borrowing of the yen, which is driving the yen up," Wang said.
"Right now, the balance of risks is against borrowing to invest, and it will remain this way until investment players are convinced that the credit market losses are over and conditions are right for a resumption of normal rates of global GDP growth," Wang said.
Economic Analysis: Economist Wang added that the U.S. Federal Reserve and U.S. Treasury face a delicate balancing act: they must discern which bad business models should not be saved, and which business models / institutions must be saved because their failure poses systemic risk.
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