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History Shows Libya Unrest Could Help Dollar

Having analyzed the impact on the dollar of numerous wars and military interventions in the Middle East since 1973, Bank of New York Mellon is telling investors that the greenback should hold up well as the international community imposes a no-fly zone over Libya.

“It is not immediately obvious that anoil price shock should necessarily be a USD negative," Simon Derrick, the head of currency research at Bank of New York Mellon, said. "Certainly, the evidence from 1973 and early 1974 indicates that investors actually sought out the USD as a safe haven during the height of the crisis.”

Derrick said he believes the imposition of no-fly zones does not necessarily mean a lower dollar.

“The evidence from the Iraqi no-fly zones is that the greenback performed surprisingly well during these periods," he said. "In the absence of direct US military involvement, the dollar has tended to either to stabilize or gain ground.”

Boots on the Ground

The Obama administration has gone to great lengths to show that the imposition of a no-fly zone over Libya is not US led and appears very unlikely to commit US forces on the ground. Derrick said this is likely to help the dollar .

“The risk that the US will need to become involved militarily on the ground has, usually, been a fairly direct dollar negative," he said. "If the US does become involved militarily then a decisive move to ensure victory has usually fed through into a stronger dollar as well.”