The USD rose today across the board against all major currencies. The EUR/USD value dropped to 1.4850, below the support level of 1.5000 which it has seemed so comfortable in earlier this week.
The reason why the USD is now gaining is simple: FEAR!
During the global financial crisis we’re in (and don’t let anybody tell you we’re out of the woods yet) the USD has always been a safe haven currency, a place where money goes when traders and investors fear that there is no where else where it’s safe to put their money, or that the risk/reward ratio is just to high.
What caused this sudden resurgence of fear? The Dubai World announcement from yesterday that they’ll not be paying their debts for the next 6 months. These aren’t just small debts. Dubai World is the largest investment organization in Dubai with debts of about (drumroll, please) 59 billion Dollars. A tidy sum, you’d agree.
I read yesterday that some European countries may have to raise the amount of debt that is owed them in 2010 by 5% just because of this 1 organization.
But it doesn’t stop there for a few reasons:
1. Who’s to say that Dubai would be able to pay its debts when the 6 months are over? The answer is that no one knows. Dubai World has a very short time to come up with the money and there is simply no guarantee that it will be able to pay up. In fact, there is speculation that they will default on their loans and leave all of their debtors with nothing.
2. The feeling among investors is of grave uncertainty. If this can happen to Dubai World, which until yesterday no one was talking about, it can happen to a bunch of other countries and institutions. Who knows what news tomorrow will bring. Greater uncertainty equals greater sense of risk.
Folks, the crisis isn’t over yet. It may not be as bad as it seemed at the beginning, but we’ve still got a long way to go. This is why the Dollar is rising and stock markets tumbling around the world. Something any Forex trader should take into account.
