The resilient dollar

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In Britain, where earnestness is a sin and drollery a virtue, dismay about the global financial crisis is best masked with humour. The British reaction to bank failures is to josh that the best place to store money is under the mattress—or in an Irish bank. When America’s $700 billion rescue package stalled in Congress, Willem Buiter, an economics professor, prolific blogger and honorary Brit, joked that his “remaining financial wealth is now kept in a (small) old sock in an undisclosed location.”

A worried saver, such as Mr Buiter, shunning banks for the safety of hosiery, still faces a choice about what store of value to use as stocking filler. Gold is for the really scared. Its price has risen by about one-fifth in the space of three weeks. Makers of gold bars are struggling to keep up with demand. Even central banks now seem less keen to swap gold for paper currencies. European ones agreed in 1999 to limit their combined gold sales to 500 tonnes a year. In the 12 months to September, they sold just 343 tonnes, the lowest total since their pact was forged.

Gold tends to do well when the dollar struggles. And there are good reasons to be anxious about the dollar. America depends on foreign savings to finance its large current-account deficit, which was close to 5% of GDP in the second quarter. But the allure of America’s financial assets has been tarnished by the shakiness of its banking system. Bail-outs and state guarantees to shore up the system may help, but they also strain public finances and raise concerns that the government may be tempted to inflate away its debts by printing money.

Yet for all these worries, the dollar has come through the recent turmoil surprisingly well. It initially gave up some of the ground it made over the summer but swiftly recovered (see left-hand chart). The persistent foreign demand for American assets is remarkable given all those scares. Last year just over $2 trillion of capital—direct investments in firms or purchases of bonds, equities and other loans—came from investors outside America, mostly private ones. This was more than enough to cover the $730 billion current-account deficit and leave enough over to finance $1.3 trillion of investments by Americans overseas.