Dollar Scarce as Top-Quality Assets Shrink 42%
The dollar is proving scarce, even after the Federal Reserve flooded the financial system with an extra $2.3 trillion, as the amount of the highest-quality assets available worldwide shrinks.
International investors and financial institutions that are required to own only the highest quality assets to meet investment guidelines or new regulations are finding fewer options beyond dollar-denominated assets. The U.S. is one of only five major economies with credit-default swaps on their debt trading at less than 100 basis points, meaning they are viewed as almost risk free. A year ago, eight Group-of-10 nations fit that category, data compiled by Bloomberg show.
The pool of high-rated assets has been shrinking, not just in the euro zone but elsewhere as well, Ian Stannard, Morgan Stanleys head of Europe currency strategy, said in a May 22 telephone interview. With the core of Europe shrinking, and the available assets for reserve purposes shrinking, it makes the euro zone less attractive.
Euro Depreciation
The dollar is gaining mainly at the expense of the euro, which has depreciated almost 5 percent the past six months against a basket of nine major currencies tracked by Bloomberg as nations from Spain to Italy see their credit ratings downgraded amid the regions sovereign crisis.
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