Finally, the search is over! After a decade of playing hide-and-seek with the U.S. government, Osama bin Laden has finally fallen! Five months of spying and planning (and maybe even practicing on Call of Duty?) culminated in a 40-minute firefight that ended with the death of the world’s most wanted terrorist.
Americans poured out into the streets after news broke out that the U.S.‘s number one enemy had fallen. Crowds formed seas of red, white, and blue as cries of “USA! USA!” filled the night air.
Not wanting to get left behind, the markets expressed their joy as well. With the al Qaeda’s leader finally out of the picture, a broad risk rally ensued and lifted other major currencies against the safe haven dollar.
However, the dollar eventually had the last laugh on Monday as it ended the day ahead of most of its major counterparts. It seems after all was said and done, investors still believed the dollar was the best bet on that day.
So does this mean Osama bin Laden’s death will have a lasting effect on the dollar? Not necessarily!
For one, its effects on global risk basically cancel out. The risk of an al Qaeda retaliation sort of counters improved risk appetite brought about by the death of the world’s most wanted terrorist. Although many predict that retaliation efforts are isolated and will only have minimal impact, it does take away a bit of the safety effect of Osama’s death.
The second and most important factor to consider is that while good vibes are high in the U.S. right now, the country’s fundamental problems haven’t changed.
Unless the Fed members have suddenly turned hawkish because of Osama’s death, we have no reason to believe that the Fed will change its dovish stance from last week’s FOMC meeting. Remember that since the beginning of the year, the dollar has been losing ground against its major counterparts on interest rate differentials and weak economic growth.
And while we’re on the subject of economic growth, we might as well recall that the latest economic reports from the U.S. haven’t exactly been attractive for dollar bulls. The latest GDP report, for instance, came in below expectations at only 1.8% in the first quarter. Of course, let’s not forget that U.S. officials still haven’t presented a solid, long-term plan to rid the country of its debts!
I guess what I’m trying to say is that while it’s definitely a cause for celebration to be rid of the most dangerous terrorist in the world, we shouldn’t trade based solely on initial price action. If you look closely, you’ll see that the event really didn’t do anything to change the dynamics of the dollar.