(James Saft is a Reuters columnist. The opinions expressed
are his own)
By James Saft
LONDON The conflict between Russia and Georgia
is giving the dollar an old-fashioned boost, based on U.S.
stability and military if not economic might.
Armed conflict between Russia and its former and vastly
outmatched Soviet neighbor Georgia over South Ossetia has
re-awakened investors' awareness of the safe-haven value of the
And while few are predicting a return to Cold War-style
tension, this flight to safety no doubt gave a boost to the
dollar's rally last week as Russian troops rolled through South
The dollar has enjoyed a sustained and sharp rally since a
July slump prompted by concern over mortgage giants Fannie Mae
and Freddie Mac, rising by as much as six percent against a
basket of currencies .DXY.
That recovery was primarily driven by a realization that
the rest of the world, Europe specifically, was joining the
United States in the economic doldrums.
The sight of Russian forces in action -- despite the
inevitable and fruitless Western objections -- makes holding
the currency of a country whose financial system is shaky but
which is not currently shelling its neighbors that much more
"Suddenly the idea of being in a nice, big safe market like
the United States is a bit more attractive," said Simon
Derrick, head of foreign exchange strategy at Bank of New York
Mellon in London. "People are reassessing where they want their
money in this environment."
Russian shares in the MICEX index touched their
lowest level in almost two years while the rouble tumbled on
Monday, prompting intervention in its support by the Russian
central bank. But assets recovered later after President Dmitry
Medvedev said the conflict may be nearing its end.
Depending on events in the Caucasus the benefit to the
dollar could have further to run, but the impact of the
conflict on oil will also be important.
Oil mostly ignored the conflict in its early days but rose
on Monday as exports from the Caspian region were disrupted.
However, even were the conflict to spiral and raise risks of
serious and sustained disruptions of exports, it is possible
that Europe and the euro would bear the brunt of the impact.
To be clear, markets seem relatively calm about the
conflict, perhaps at least in part because its implications are
difficult to guess, much less quantify.
Stephen Lewis, economist at Monument Securities in London,
sees the euro as first in the firing line if tensions escalate,
but draws a different long-term conclusion.
He argues that a significant increase in tensions between
Russia and the West might prompt a further escalation of
military spending in the United States, bringing with it a
wider budget deficit.
"A wider budget deficit might well be associated with a
weaker U.S. current account outlook and ultimately with more
downward pressure on the U.S. dollar," he wrote in a note to
THE DOLLAR AND PAST CONFLICTS
Derrick at Bank of New York Mellon found that the dollar
generally did pretty well during times of conflict and
geopolitical shocks in the period between 1973 and 1993, even
at times when U.S. interests and influence could be said to be
"One simple fact stands out: it was rare for the dollar to
lose a significant amount of ground during one of the events.
Indeed it is arguable that the only really dollar negative
event proved to be the initial fall-out from the Iranian
hostage crisis ... and failed rescue," Derrick wrote in a note
"Perhaps even more telling was the markets' reaction to
Russia's invasion of Afghanistan, marking as it did the start
of a significant dollar rally."
The dollar rallied briefly after 52 U.S. diplomats were
taken hostage in Tehran in November 1979 but fell over the next
month and a half by more than 4.5 percent.
When the Soviet Union invaded Afghanistan just before
Christmas in 1979 that decline continued but was reversed
sharply in a monumental 11.5 percent rally between early
January and April of the following year.
Of course there are very significant differences between
now and the latter part of the 20th century, when global
conflicts could be viewed in the frame of U.S.- Soviet rivalry.
That very likely prompted investors to view conflict as an
opportunity to simply buy dollars.
But on the margin, and given that the dollar has a trailing
wind, a hot conflict involving Russia, and the prospect of more
muscle flexing to come, should support the dollar.
It also has to be said that now is a very good time for
there to be a bit of a two-way market in dollar risk,
especially from the point of view of U.S. authorities who must
oversee a painful economic adjustment and a risky financial
system recapitalization, all while continuing to borrow massive
amounts of money from the rest of the world.
-- At the time of publication James Saft did not own any
direct investments in securities mentioned in this article. He
may be an owner indirectly as an investor in a fund. email:
(Editing by Ruth Pitchford)