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The United States may be ungovernable but Thursday's market action confirms that the greenback remains the world's reserve currency and is still considered a safe haven.

Investors expecting a U.S. dollar rally in the wake of Congressional détente were surprised by a 1.3 per cent decline in the U.S. trade-weighted dollar index Thursday. Gold soared almost three per cent intraday and domestic materials stocks also shot higher – clear signs of a "risk on" market rally.

The greenback's weakness on the day strongly implies that global investors had been parking funds in U.S. dollar assets during the Congressional standoff. In other words, the heightened global economic risk surrounding debt default was paradoxically attracting investors into U.S. currency-denominated investments.

Now that a settlement has been reached, investors are now free to offload dollar assets and use the proceeds in a hunt for excess returns.

The risk of default was never really taken that seriously by the market – the dollar didn't decline enough to generate a post-settlement snapback rally. Volatility in U.S. bond markets was almost entirely limited to one-month Treasuries – longer duration issues barely budged.

U.S. dollar strength during the crisis also reflects a lack of reasonable alternatives as a safe haven or reserve currency. Where the euro's concerned, European Union governance may be much more civil than American, but the prospect of a coherent economic plan appears no less remote. The Swiss franc isn't liquid enough. Even if the renminbi wasn't already pegged to the greenback, China would have to run enormous trade deficits for many years to make the currency freely available for global trade.

Many questioned the dollar's reserve status during the debt ceiling fiasco, but it appears we're stuck with it.

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