When things got ugly, the US dollar returned as king of the global currency market. J. Cristoph Amberger says dollar bears forgot that most other economies are in a worse state than the US.

What ever happened to safe-haven currencies?

You know what I mean, the much-touted coin of the realm in other, smarter, more mature countries. “Hard currencies.” Issued by countries who’d outrun, outplay, outlast the spendthrift United States…

…and “decouple” from the Demise of the Dollar.

Don’t you think it’s quite amazing how poorly those safe havens did when it really counted? The euro, the Aussie, kiwi, loonie dollars (as the cool guys in the currency forecasting racket call them). How about the pound sterling? The Russian ruble? The Icelandic krona?

You might as well have put your money in Bill Miller’s Legg Mason Value Trust.

Could it be that there’s been a mistaking of cause for effect?

China’s rise from rice paddies to riches was so dazzling, its demand for commodities propelled the economies of the supplier economies to new heights. They developed beautiful trade balances by shipping coal to Nanking, gold to Guangzhou, and copper to Chongqing. Budget surpluses even. While at the same time, the U.S. dollar was allowed to do what American manufacturers and exporters wanted it to do: Keep U.S. exports cheap and expanding despite the cut-throat competion from the Far East.

But the main factor behind Chinese expansion was not the conversion from Mao to Tao… but the insatiable demand for consumer goods from the richest economy on earth. A demand so huge that it compensated for the demographic and economic short-comings of most other economies as well.

That fact was recognized by most national financial institutions who figured out that by lending money to America, they’d buy demand for their products.

Somehow, this dynamic must have escaped the dollar demisers. Who didn’t quite think through what effect the decline in American consumption would have on the global economies whose economies, markets, and currencies depended on it.

Those who followed the directive of the doomsday sayers may well say they saw the crisis coming. But given the losses in most “safe havens”, the practical result of their prudence was the equivalent of switching ocean liner tickets from the Titanic to the Lusitania—minus the 3-year delay in between sinkings.

They’re still at it, though. Massive U.S. budget deficits are going to wreck the dollar, they proclaim. Could be. Especially if these deficits were to occur in a world where all other countries had positive balances.

But most other economies are worse off the the United States. (Ironically, one of the few currencies rising in value right now is issued by a country who has never paid much heed to debt levels.) And currencies are by nature reflections of relative value at any given time.

A relatively higher dollar allows Americans to buy more consumer goods… which may give export-dependent countries a chance for survival. It’s simple self-preservation.

Look for the euro to decline to $1.25 by next week.

Source: What ever happened to Alicia Silverstone?