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Is US Dollar's Recovery Tied to Death of Bin Laden?

Concern about mounting budget deficits on the state and federal level, along with the Federal Reserve’s easy money policies, sent the U.S. dollar reeling earlier this year to near a post-gold reserve low.

Saudi-born alleged terror mastermind Osama bin Laden is seen in this video footage recorded at an undisclosed location in Afghanistan aired by the Qatar-based satelite TV station al-Jazeera in 2001.
AFP | Getty Images
Saudi-born alleged terror mastermind Osama bin Laden is seen in this video footage recorded at an undisclosed location in Afghanistan aired by the Qatar-based satelite TV station al-Jazeera in 2001.

Then on May 2, a Navy Seal team killed Osama Bin Laden, the world’s most wanted man, responsible for the 9/11 tragedy on American soil.

That day, the dollar index, which measures the currency versus a basket of six others, would bottom and is now nearly 3 percent higher. Coincidence? Many traders say, “I think not.”

“The fact that we killed this guy and did it so efficiently was a wake up call to people who had forgotten that this is the dominant military in the world,” said Steve Cortes, founder of Veracruz research and a ‘Fast Money’ trader.

There were many reasons throughout history that a currency has become the reserve money of the world, but the most common has been the country’s military might, specifically that of its navy. If a country controls the seas, then it controls trade and therefore can sustain its spot as the largest economy in the world.

Recently, this reason seems to be lost on many predicting the end of the dollar as the world’s reserve currency. Even besides this rather barbaric notion, there are many more reasons why the dollar will retain its reserve status for a very, very long time, notwithstanding many ups and downs, wrote John Shin, Bank of America Merrill Lynch FX Strategist, in a note. Most notably, he cited the size of our economy and the depth of our financial markets.

“The U.S. is still the largest economy compared to the Eurozone, and at the moment China’s economy is roughly a third the size of the U.S. economy,” said Shin. “The lion’s share of currency trade still involves the U.S. dollar and the sheer liquidity of the U.S. Treasury market is unrivaled by any other financial market for FX reserve managers.”

The dollar’s run since last week has been aided by a flare up in the Greece situation in Europe. The country is on track to miss its fiscal targets and rumors of a bond haircut or a complete fissure from the European Union are hitting the Euro. Meanwhile, global investors are seeking the safety of the 10-year U.S. Treasury, whose yield touched the lowest since December on Monday.

The extraordinary monetary measures enacted by Fed Chairman Bernanke have shaken the confidence in the dollar and have raised concerns the country may try to inflate its way to paying its debts. Still, one would think more investors would be fleeing dollar assets like Treasuries if that were truly the biggest worry.

To be sure, gold has jumped to a record amid chatter it would ultimately replace all paper money as the world’s reserve currency. Gold, and the biggest holders of it, has played the key role in determining the way in which the bulk of trade is exchanged.

“During the Civil War the United States suspended the gold standard to pay for the war and most of that gold flowed to the UK,” said Brian Kelly, founder of Brian Kelly Capital. “The result was that the British Pound became the reserve currency of the world.”

“At the end of WWII, not only was Europe devastated, but also had no gold. The US, with an abundant amount of gold, was the only country that could have a reserve currency since paper currencies were not trusted,” added Kelly, a student of financial history and a ‘Fast Money’ trader.

Conveniently, the biggest holder of gold in the world right now is the U.S., with 8,965 tons in its vaults worth more than $380 billion, according to the World Gold Council. Germany is No. 2 on that list, and China, despite its purchases of the last decade, is only the sixth largest holder.

Investors sticking with dollar assets are making a bet that the U.S. has enough economic might, military power and gold reserves to buy plenty of time to get its fiscal house in order before any other country can threatens its status as the world’s manner of exchange.

Still, China knows its history and will soon set sail with its first aircraft carrier, the “Shi Lang,” which was purchased from the Ukraine and rebuilt completely by the emerging economic power.

Dennis Gartman, of The Gartman Letter, isn’t worried though. He wrote in a strategy note before Bin Laden’s death: “As we like to say, the mischief makers around the world awaken each morning and ask, ‘Where are the U.S. aircraft carriers?’ for they know that each carrier, with its attendant ships and her Marines aboard and the fighting power of her aircraft can wreak havoc…and will…if called upon.”

They got the call a week ago.

For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.


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Trader disclosure: On May 9, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Finerman and Finerman's firm own (AAPL); Finerman and Finerman's firm own (BP); Finerman owns (C); Finreman and Finerman's firm own (CVS); Finerman's firm owns (IBM); Finerman's firm owns (JPM) and is long (JPM) leaps; Finerman owns (JPM); Finerman and Finerman's firm own (MSFT); Finerman's firm owns (TGT); Finerman owns (UNG); Finerman owns (USO); Finerman's firm is short (IWM), (SPY), (MDY); Finerman's firm owns s&p puts; Finerman's firm owns Russel 200 puts; Terranova owns (XOM); Terranova owns (BAX); Terranova owns (SLV); Terranova owns (TCK); Terranova owns (APA); Terranova owns (HOC); Terranova owns (OXY); Terranova owns (UPL); Terranova owns (FCX); Terranova owns (BX); Terranova owns (V); Terranova owns (VRTS); Terranova owns (JPM); Terranova is short (NFLX); Terranova is short S&P Futures; Cortes owns (EXC); Cortes owns (SO); Cortes owns (TGT); Cortes owns (K); Cortes owns (KFT); Cortes is short Nasdaq futures; Cortes is short EEM vs S&P long; Cortes is short EUR vs USD and CHF; Seymour owns (AA); Seymour owns (AAPL); Seymour owns (F); Seymour owns (POT); Seymour owns (SLW)

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