Brittle safe havens

Recent weeks' strengthening of the USD against the EUR, alongside the decrease of U.S. yields, has strengthened the dollar's status as the world's financial safe haven. While gold and other precious metals have always seemed to retain their value, the same had only applied to few selected currencies. Today we will review some of the process of consolidating monetary systems, and place the dollar's status in context. 

Currency is often defined as any physical mean that is used as a medium of exchange. Historically, many currencies existed only within a local scope, but the rise of global trade necessitated a medium of exchange that would be generally accepted and would be able to maintain its value. In the ancient world, precious metals were the obvious choice, mostly being conveniently minted to “standard” weights. These weights became synonymous with their value as currency. The ambiguity between the money and the commodity it was made of led to defining it as "commodity money". Two such examples of commodity money were the Chinese Tael and Greek Drachma. 

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Wednesday sported an opportunity for U.S. data to shake the markets. Initially, the ADP employment change was released, and presented a very impressive increase of 215,000 jobs in the U.S. economy during November. When the promising data started advocating the tapering of QE3, it also sent the USD to strengthen nearly 0.5% versus the EUR. However, the day did not stop there, as the ISM Non-Manufacturing Composite Index was released shortly after, with less appeasing results. The negative 53.9 figure dispersed some of the QE3 tapering concerns, weakening the USD back to the 1.36 levels versus the EUR, where it started at. Equity reiterated their example for the “Bad news is good for stocks” paradigm, as the S&P500 gained approximately 0.7%.

Thursday saw a rather expected decision by the Bank of England to keep the official bank rate at 0.5%. The day’s protagonist, on the other hand, is probably the Department of Labor’s Initial Jobless Claims report, which indicated only 298,000 Initial Claims were submitted during the previous week. The last time this occurred was September and the figure has since surged to as high as 737,000, due to the Government’s shutdown. However, it seems that optimism regarding the labor data was already priced in the markets, as a result of the previous day’s positive ADP figure. Evidently, markets saw little change following the print.

Friday was somewhat of a different story. The day started with very positive indications regarding the U.S. labor market. These included U.S. Nonfarm Payrolls adding 203,000 Jobs in November, and perhaps more importantly U.S. Unemployment dropping to a level of 7.0%. Stock derivatives’ immediate response was to lose about 0.5%. Taper-induced trading was also evident in gold which took quite a blow and of course the USD which strengthened by almost 0.3% versus the EUR. Interestingly, things did not stop there - when the official trading started market opening was on average a tad higher than the previous day’s close. However, soon after that euphoria spread around equity markets, which lead both the Dow and S&P 500 to close their trading days more than a percentage point higher than the previous day’s close. 

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