Dollar as Safe Haven
Brad Setser notices that, this time, bad news for the world economy wasn't good news for the dollar:
Brad Setser: One interesting point: the dollar didn’t benefit from today’s flight to quality. Fair enough. The currencies of countries with big current account deficits facing a shortfall in private inflows aren’t classically considered the gold-standard by those looking for a safety.
That though is a bit different than last spring, when the dollar did benefit for a while from the flight out of emerging markets in May (more here).
I think Macro man probably has this story right: after the April 2006 G-7 communique (the one that briefly made Dr. Roach an optimist) some big players started to bet that the dollar would fall... using the dollar to finance their high-carry bets on Turkey and Brazil... [or] on Turkish, Brazilian and Russian equities. When those bets unwound in May and June, the dollar got a bit of a boost.
Today, though, it was the yen that got the big boost. Bloomberg:
The yen also advanced 4.1 percent against the Turkish lira, 3.9 percent versus the South African rand and 2.8 percent against Iceland's krona as investors shunned riskier assets in emerging markets following a rout in Chinese stock market shares.
Yet more circumstantial evidence that leveraged bets on the emerging world right now are--or were--financed not with dollars but with yen and swiss franc...
