Where have all the ‘dollar bears’ gone?

Seven months ago, I received a rather interesting real estate proposition: a reader wrote in with an offer to sell me “a bridge in Brooklyn”. And, being obviously generous to a fault, he even offered it “cheap”.

That sarcastic offer — the ultimate merchandise metaphor that mocks human gullibility — was made in response to one of my articles here. I had argued that the then-widespread hysterical ranting about an “imminent collapse” of the US dollar and its “inevitable” devaluation as global reserve currency was merely the alarmist scare-mongering of ‘dollar bears’ and ‘bullion bulls’ who were making jackasses of us others.

My point was that although the dollar was weighed down by fundamental problems, accounts of its “imminent death” and the rise of alternative reserve currencies were greatly exaggerated and low on economic and realpolitik wisdom.

The ‘dollar bears’ growled in response, mocked me for my naivete, and offered to sell me the Brooklyn bridge.

That’s because the ‘dollar collapse’ hysteria of those days was deafening. China and Russia were aggressively talking down the dollar in order to gain geopolitical leverage against an economically enfeebled US; traders and racketeers were short-selling the dollar for profit.

And reams of ill-informed media commentaries were amplifying the bears’ growls even louder.

The hysteria found culmination in a sensationalist report in a British newspaper that Gulf oil-producing states were in secret talks with China, Russia, Japan and France to dump the dollar and move to a basket of currencies.

The report didn’t specify any name for the proposed new reserve currency mechanism, but ‘hallucination’ might, I think, be an appropriate moniker, given that such an arrangement would be the delusional outcome of a feverish imagination.

Since then, however, the dollar bears have lost their voice and their conviction. They haven’t exactly crawled back into their caves to hibernate: in fact, they have been transformed into ‘dollar bulls’ and have been shamelessly stocking up on the same US dollar assets they earlier denounced as doomed.

What it took for them to stampede into the safety of the US dollar was a sovereign debt crisis in Europe that made the economic trouble in the US seem like a teddy bear’s picnic.

According to the most recent data available, foreign purchases of US Treasuries surged to a record high in March. China, which had last year been making much of its plans to diversify away from the dollar and into the euro, has returned to its mercantilist stockpiling of dollar assets, even postponing an anticipated de-pegging of its currency from the dollar.

Likewise, the Russian bear has been forced to acknowledge the limits of its currency bluster and raise its dollar holdings.

Even informed economic opinion is coming around to the view that the dollar, for all its inherent weaknesses, isn’t about to curl up and die.

Currency strategists now reckon that over the next 10 years, the dollar will in fact morph from being a ‘safe-haven’ currency — to which investors flock only in times of crises — to a ‘growth currency’.

That’s because the US economy, for all its frailties, is expected to outperform Europe and Japan over that period, and since currency markets are like beauty contests, where relative allure decides who wins, the dollar should still fare relatively well.

Of course, none of this will convince diehard dollar bears. At the first sign of economic trouble in the US, they’ll come growling out of their caves with yet more ‘dollar collapse’ theories. This time, if they offer to sell me a Brooklyn bridge, I’d be happy to oblige — and pay them with wads of the ‘hallucination’ currency they obviously prefer.