James Pethokoukis

Politics and policy from inside Washington

Dubai and the dollar

November 27, 2009

My pal Felix Salmon makes a good point about the dollar and Dubai. The greenback initially slid on the news. But isn’t the greenback supposed to be a safe haven. Felix opines as follows:

Needless to say, this isn’t exactly a classic risk-aversion reaction: when the markets are really scared, they tend to flee to the safety of the dollar, rather than to the Japanese yen. So my feeling is that this — along with the relatively modest stock-market reaction in New York this morning — counts as a sign that Dubai really isn’t all that bad: it shows that markets are trading the news, rather than panicking.

On the other hand, it’s clearly not good news that a severe-if-not-life-threatening shock such as this one sends the dollar down rather than up. The immense fiscal cost of the financial crisis has hurt the dollar’s standing as the global reserve currency, and if I were at Treasury right now I’d be very concerned about this reaction. Not that there’s much Treasury can do about it.

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