Temporary rally in the works for greenback

When you and your friends are being chased by a bear, you only need to run faster than your friends. Likewise, the strengthening US dollar suggests that America is sprinting faster than its many European and Asian friends.

There are several reasons to support the US dollar at the moment. For example, foreign-exchange analysts believe the world has been selling the greenback for the past seven years. In this crisis, there could be massive short coverings.

The US dollar index, which measures it against a basket of major currencies, has fallen from a high of 121 in 2001 to a low in the 70s this July.

With the index now in the 80s, analysts suggest that investors will flee back to the US dollar due to deleveraging, fund redemption and asset liquidation.

On the economic front, America is in a terrible position, regardless of whether economists think that other countries are worse.

As the current financial crisis has to do with liquidity and leveraging, countries that are overly leveraged are prone to be squeezed.

The loan-to-deposit ratio, the total amount of banks loans divided by its total deposits, shows the amount of leveraging at work.

The higher the ratio, the more geared a country's banking system is, and the more troubling it will be. Although this ratio is not the ultimate indicator, it does show that America is in a relatively better position than other countries.

Based on my rough estimates of total bank loans and deposits, the United States currently stands at 100 percent.

The UK and Germany hover around the 130 percent level, while France is at 97 percent.

Emerging markets such as Russia and Brazil are well over 150 percent.

South Korea's ratio is 141 percent, while Australia's is 131 percent.

It is worth noting that Hong Kong and the mainland are in good positions at 80 percent and 65 percent, respectively.

The US dollar's strength suggests the world still runs on the greenback. After all, it is the main currency for world trade, and a safe haven for many.

That said, we must bear in mind the US national debt currently exceeds US$10 trillion (HK$78 trillion).

With the financial bailout packages, in which the government is throwing out approximately US$4.6 trillion, we can only surmise the fate of the dollar when the world recovers. After all, we need to remember that there is always a disclaimer on the greenback: In God We Trust.

Ronald Chan is the founder and chief executive of Chartwell Capital, a private investment company.