Investors seek safe harbour from US downturn

Much has been said and written about the US budget and trade deficits and that, as a consequence of these, the US dollar is following a one-way street down hill. After all, even the richest of the rich (source: Forbes), Bill Gates of Microsoft and Warren Buffett of Berkshire Hathaway are short the greenback, diversifying or hedging their bets into other currencies. However, to take the euro as the most eligible alternative currency to protect against further depreciation of the US dollar has not been a profitable trade for most of the period since the beginning of 2004. While the calendar year 2004 saw the euro appreciate by 7.9%, the first half of this year saw a loss of 8.2% which took one back to square one. To make things worse, since the Fed raised its benchmark interest rate any euro hedging now comes at a cost. In the meantime, this interest rate gap has widened further in favour of the US dollar. To be sure, this  is not designed to make a case for the euro, but rather bring into question the hasty conclusions of some managers about how to tackle the task of diversification in general and whether or not currency diversification brings specific advantages.