Strong dollar could derail markets

The dollar became the funding currency of choice as global asset markets recovered from the lows of March last year.Ulralow interest rates in the US encouraged carry trade investors to sell the dollar to finance the purchase of riskier assets. The Governor of people's Bank of china fears that carry trade might start to unwind pushing the dollar higher and derailing the rally in assets market that has accom- panied global economy's emergence from the financial crisis. Just as the Japanese Yen jumped higher following collapse of Lehman brothers in 2008, dollar is streng- thening. So assets such as commodities,equities and other higher yielding currencies sell off. The dollar has become the funding currency as global assets markets recovered from their post-crisis lows from 2009 March.This was because ultra low rate of interest in the US encouraged carry trade investors to sell the dollar to finance the purchase of riskier, high yielding assets. The result was that the currency fell by 17% on a trade weight basis. Since Dec-2009,the currency has risen more than 8% on a trade weighted basis. Speculative data Analyst say that there is evidence outside short-term speculative data that investors have build significant long positive strides in dollar. Further more they say the dollar is unlikely to lose its status as a funding currency desoite the federal reserve's decision to raise the discount rate. John Normal at Jpmorgan says concerns about soverign risk issues in Europe and surprising actions of other central bank have boosted the dollar over a few weeks before. The Reserve bank of Australia failed to raise interest rate this month while the bank of England announced its willingness to extend quantitative easing. This has contributed to dollar strength. Therefore it could be concluded that a dollar could not be moved to an investment currency from a funding currency follow- ing a global tighening