The Dollar Becomes a Crowded Trade

best investing podcasts - Jason HartmanThe US dollar continues to trade strong in world markets. But as it continues its climb, some market watchers worry that it might be time to put on the brakes.

According to a recent article from Business Insider, the dollar has become what’s known as a “crowded trade” in the international money markets. What’s more, it may be the world’s most crowded trade, the darling of speculators and eager investors convinced of its long term strength in a world of volatile currency shifts that make the dollar’s stability more appealing than ever.

While the dollar’s surge is a testimony to that very stability and long-term value, it doesn’t always bode well for international commerce and domestic prosperity. And in a crowded trade, there’s always a time when the crowd disperses.

A crowded trade, in the world of international investing, is one that attracts a large number of investors and speculators, all holding to a set of convictions about the market itself an the continued rise of the asset in question.Trades become crowded when that asset gets suddenly hot – the price appreciates fast and quickly attracts a flock of speculators and long-term investors convinced of its money making potential.

That’s what seems to be happening with the dollar, whose surge in popularity comes at a time when other major currencies are facing problems at home and abroad. In the face of those currency woes, the dollar becomes a safe alternative. Argentina’s 2014 debt crisis boosted the dollar’s popularity on both the legitimate and black currency markets.

Facing international disapproval and economic troubles at home, Russia has seen a steep decline in the value of the ruble. Worries about its long-term stability, Russians of all income levels began converting their savings and investment into foreign currency – mainly the dollar – whenever possible. Russian banks experienced shortages in foreign currencies, and black market trading surged back.

In Europe, too, the Eurozone is suffering financial setbacks. A majority of the Zone’s member nations dare either headed toward or already in periods of deflation, with flattened prices and slowing economic growth. The euro is trading lower than its leading competitors, causing the European Central Bank to ponder a round of quantitative easing that would put more euros into circulation.

Those moves, along with Switzerland’s decision to let its franc float against the euro and other currencies in world trading, have triggered talk in investing circles of an impending “currency war” of increased volatility in world markets and aggressive maneuvering by central banks.

It’s in that uncertain environment that the dollar sits at the top of the currency trading heap – maybe little too high, in the opinion of some economists and financial experts, who worry that the current “dollar rush” could collapse all too quickly.

That’s why they’re calling for some restraint on the dollar’s strong showing. A strong dollar sounds like a good thing, but may actually not be. The downside of a crowded trade is what happens when the asset takes a tumble – a scenario that’s been likened to a crowded theater with only one exit. What happens when everyone decides to leave at once? In the monetary world, the equivalent is a quick unloading of the underperforming asset.

Against a very strong dollar, other currencies trade weaker. That can affect international commerce and financial transactions of all kinds, including pricing of goods sold internationally and the management of dollar denominated debt held by countries around the world.

Easing off on the dollar’s surge would give world markets a chance to find balance and forestall a rush to abandon the dollar when its trading slows. But the fate of the dollar and its future as a crowded trade depends largely on the decisions of the Federal Reserve, which has observed that a strong dollar could harm US interests abroad and slow the economic recovery at home.

The Fed is in the process of tapering off its own most recent round of quantitative easing, an intervention aimed at keeping interest rates low in order to stimulate the economy’s recovery, and under new leadership is taking a cautious approach to major shifts in monetary policy.

As Business Insider points out, the landscape of international finance is constantly changing. World events and domestic upheaval make long-term predictions a risky business. But for now, as the dollar flexes its muscles on the world stage investors with an eye to future returns are happy to join the crowd.  (Top image: Flickr/SqueakyMarmot)

Read more from The American Monetary Association:

AMA111: Six Steps To Wealth With Linda P. Jones

Will Deflation Derail World Economies?

The American Monetary Association Team


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