Still Sound as a Dollar

Conservatives nowadays routinely worry about the dollar’s strength and stability. The dollar, however, refuses to cooperate. Instead, it lately has been rising in foreign-exchange markets, as it typically does in times of international economic and financial stress.

The dollar serves as a safe haven. Investors tend to transfer funds into dollar-denominated assets, such as U.S. Treasuries, at moments when financial markets around the world are being buffeted. This occurs even if the U.S. economy is not in good shape. As long as the dollar and dollar-denominated assets are seen as relatively safe, the dollar will tend to strengthen in times of trouble.

That’s what been happening in the last few days. It’s also what happened in 2008 and 2009 as the mortgage-fueled financial crisis spilled over. The euro, meanwhile, is now floundering amid Europe’s financial and fiscal crisis. And the Chinese yuan lately has displayed considerable downside risks, as well.

This resilience of the dollar in tough times is bad enough for the hard-money and gold-bug types who currently dominate conservative discourse on monetary policy. What’s particularly embarrassing for them, though, is that gold now is showing marked signs of weakness — as if perhaps the precious metal is subject to a dangerous propensity for bubbles and busts that should make investors beware.

In coming decades, the dollar increasingly may share its reserve currency status with other currencies, provided other currencies develop the safe-haven status the dollar now enjoys. But it’s time for conservatives to cash out on their overblown alarmism about the buck.