- Published on Tuesday, 19 June 2012 09:00
- Written by Adam English, Associate Editor, Inside Investing Daily
- Hits: 396
In spite of fundamental weakness in the U.S. dollar, more and more dollars are being snapped up by central banks.
The latest International Monetary Fund figures show the dollar's share of global reserves rose 1.6% to 62.1% in December from an all-time low of 60.5% in the second quarter of 2011.
The buying has left the private sector with roughly $2 trillion less than it needs, according to investment-flow data by Morgan Stanley. And as you know, when supply dips... prices rise. The company's analysts see the dollar gaining 8.2% through 2012.
Morgan Stanley isn't the only bull either. The ICE U.S. Exchange has seen a large increase in long positions. They now outnumber short positions by 52,600 contracts, representing a $4.3 billion difference.
The Federal Reserve has created $2 trillion through quantitative easing, which, under normal circumstances, would only work to dilute the value of the U.S. dollar and push investors away.
However, the lingering international issues are keeping the global economy in anything but normal circumstances. The ongoing woes in Europe are the main culprit.
Even through Greece will be governed by pro-bailout politicians, there still is no resolution to the underlying crises. Add concerns about Spain, Italy, and economies flirting with a new recession and the euro becomes too risky to hold in central bank reserves for long periods of time.
Morgan Stanley and Barclays have revised their estimates higher in recent days. Both companies predict the dollar will end at $1.19 against a euro. Previously the consensus was around $1.30.
"The only chance that the dollar has for any sustained weakness, other than an occasional daily correction, is for a resolution of the Greek debt crisis," stated Michael Woolfolk, a senior currency strategist at Bank of New York.
For now, though, the dollar looks pretty darn good compared to just about every other currency and that's all that matters.