The Dollar Reigns Supreme in November
by Jason Jenkins, Investment U Research
Wednesday, December 7, 2011
Among all the volatility that occurred in the markets last month, it seems the dollar (DXY) was the best place for investors beating returns on worldwide bonds, commodities and stocks as the world attempts to come to grips with a European sovereign debt crisis that threatens to derail global growth.
The US Dollar Index (USDX) is a measure of the value of the dollar relative to a basket of six specific foreign currencies. It’s a weighted geometric mean of the dollar’s value compared with the following currencies:
The Index was up 2.9 percent in November, leaving it down less than one percent for the year.
Bank of America Merrill Lynch index data shows that even with U.S. Treasuries gaining 0.7 percent, global fixed-income securities overall lost 0.5 percent.
The Standard & Poor’s GSCI Total Return Index – formerly the Goldman Sachs Commodity Index, which serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time – rose 1.4 percent.
The MSCI All Country World Index (MXWD), a free-float weighted equity index that includes both emerging and developed markets, fell 2.9 percent with dividends.
“Headline Risk” Sends Investors to Safe Havens
We’re all aware of the severity of “headline risk” in this current market and the almost daily volatility it has caused. The current environment has caused flight to perceived safety and quality and the most reassuring bet right now is keeping money in U.S. dollars and Treasuries.
The sovereign debt issue in Europe made its mark on Italy last month skyrocketing yields to €-era record highs well above seven percent. The contagion even spread to all-mighty Germany and curbed demand for German Bunds. Germany was only able to sell €3.644 billion of the offered €6 billion in 10-year Bunds with an average yield of 1.98 percent two weeks ago.
The December Outlook
The Organization for Economic Cooperation and Development (OECD) last week stated the lack of faith in the survival of Eurozone is the primary risk to the world economy. The 34-member organization spans the globe, from North and South America to Europe and the Asia-Pacific region that includes many of the world’s most advanced countries and also emerging countries, expects their collective growth to be around 1.9 percent this year and 1.6 percent for 2012.
But these numbers are down from 2.3 percent for 2011 and 2.8 percent next year that they predicted earlier this May.
The U.S. currency will trade at $1.35 on Dec. 31 against the euro – up from $1.3446 at November’s end. The safe-haven appeal of the dollar has strengthened with the better than expected U.S. economic numbers that came out last week.
“The favorite strategy will be to locate the cleanest dirty shirts — the United States, Canada, United Kingdom and Australia at the moment,” Bill Gross, who runs the world’s biggest bond fund as co-chief investment officer at Pacific Investment Management Co. in Newport Beach, California, wrote in his monthly commentary this week.
Good Investing,
Jason Jenkins
Article by Investment U