‘Safety first’ portfolio shifts are bringing money home

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Like any globe-trotter, capital sometimes gets weary or fearful and just wants to go home.

That may best explain the dollar’s latest stunning gains against rival currencies. And likewise for the Japanese yen, which alone among major currencies is rising against the greenback.

Since mid-July the once-depressed dollar has been rebounding with few interruptions against an array of currencies, including the euro, the British pound, the Australian dollar and the Brazilian real.

On Thursday, amid a huge sell-off in world stock markets, the dollar rallied again. The euro slid to $1.433, down from $1.449 on Wednesday and the lowest since October. The British pound fell to $1.769, down from $1.776 a day earlier and the weakest since spring 2006.

The DXY index, which measures the dollar’s value against six major currencies, jumped to 78.61, lifting its gain since mid-July to 9.3%. That’s not peanuts for a seven-week move. If you’re headed overseas, you’ll like this turnabout; if you’re a U.S. exporter who has benefited mightily from the dollar’s long slide, you may be feeling more than a little anxious.

In August, two explanations typically were offered for the dollar’s recovery. One was that the sudden dive in raw materials prices had sapped speculators’ enthusiasm for commodities, which had been attracting money in part as a hedge against the dollar’s loss of value since 2001.

The other explanation was that global investors and currency traders were figuring that even though the U.S. economy was struggling, things were rapidly getting much worse in other countries. Currencies often (though not always) reflect the relative strength of their home economies.

Both of those factors still seem to be driving the dollar, but the second one may now be in overdrive: In recent days, the talk on Wall Street has been that hedge funds and other investors have been rushing to cash out of risky trades and come back to the classic currency of refuge -- the buck.

‘What this looks like is global portfolio reallocation,’ says Brian Dolan, chief currency strategist at Gain Capital Group in Bedminster, N.J. For the U.S., ‘Money is being brought home.’

Sophia Drossos, a currency strategist at Morgan Stanley in New York, noted that markets have been riled this week by rumors of hedge funds selling securities to raise dollars that they could use to meet possible redemption demands by nervous investors.

One popular hedge fund trade for many years has been to borrow money in Japan at rock-bottom interest rates and use the proceeds to buy high-yielding government bonds in countries such as New Zealand. That’s the so-called carry trade.

But with the New Zealand dollar in a free-fall, the carry trade is a bust. As those trades are closed out and yen loans repaid, Japan’s currency is strengthening along with the U.S. dollar. The greenback was worth 107.04 yen on Thursday, down from 108.23 on Wednesday.

Today will bring a big test for the buck: If the government’s report on August employment shows job losses far exceeding the 75,000 that Wall Street expects, investors and traders may question how much stronger the dollar deserves to be.

But if the losses are smaller than expected, look out above for the dollar.