3 December 2008
column
Johannesburg — ONE of the oddest phenomena of the recessionary environment has been the strength of the dollar. The dollar has moved from about $1,60/ € in June to $1,25/ € for the past month or so, and the trend has been the same with many other currencies.
What seems perverse about the trend is that it suggests money is flowing toward the area of biggest crisis rather than away from it.
At a presentation yesterday, Michael Power of Investec Asset Management compared this trend to a person standing near a veld fire. What you feel first is not the fire but the wind as air is sucked toward the flames. More significantly, he suggests that this tendency cannot be permanent.
The dollar is strengthening for all the wrong reasons, he says, and it is based on a desperate need and desire for cash. Yet the S&P 500 is more or less where it was in 1998, and bond yields are minimal and going down. Once investors realise that US-based investment returns are likely to be minimal, the flow will be reversed, he argues.
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