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Why the World’s Biggest Forex Investors Still Love the Dollar

President Donald Trump has a problem with the dollar: On the one hand he’s complaining about how its strength is “killing” U.S. companies by making it easier for foreign competitors to undercut them; on the other hand, he’s making the dollar more attractive to invest in.

Fresh evidence of that comes from a survey of some of the world’s biggest currency investors, the men and women who manage trillions of dollars of official foreign exchange reserves at the world’s central banks. Some 84% of respondents told the magazine Central Banking that they thought the dollar was more attractive now than it was 12 months ago. Of all the currencies tracked by the survey, only the Australian dollar (with 65%) came close.

For most, it’s simply a question of the income that dollar investments can generate. The Federal Reserve is expected to raise interest rates at least three times this year, raising the returns on safe investments like Treasury and agency bonds that are prized by risk-averse professional investors like central banks. Some also bought into the argument that Trump’s deregulation agenda would lead to faster growth and even higher returns in the medium term.

But many still remain cautious, mindful perhaps of Trump’s talk before the election about maybe not honoring federal debt in the future. Some thought that could, over time, threaten the dollar’s dominant position as the world’s reserve currency.

“If a dollar holder were to be exposed to further surprises and 180 degree turns from U.S. leaders, even if positive for the U.S., they may become fed up with constant fear of what happens and will spread the ‘core currency’ function out among more currencies,” one respondent was quoted as saying. “Holding reserves means holding safe currencies to fight other risks, not accumulating risks. Instead of waking up every morning with the stress: ‘Damn, what has happened again with my riskless currency?’, I would rather share the dollar’s burden of being the safe haven by promoting other currencies.”

Admittedly, “the world’s most attractive reserve currency” is an easy title to win this year. The euro and yen, the world’s second- and third-largest reserve currencies, are firmly out of fashion due to the negative interest rates of the European Central Bank and Bank of Japan. Emerging markets have big debts to repay, and their central banks need their investments to generate income.

Just as serious for the euro is the threat from a series of high-risk political events this year. The biggest of these is by far the French presidential election which may result in a victory for far-right leader Marine Le Pen. Le Pen has threatened to pull France, the Eurozone’s second-largest economy, out of the EU’s monetary union.

Oddly enough, there was more support for the British pound than for the euro, despite the sharp, short-term drop it has suffered since the U.K.’s vote to leave the EU last June.

“We hold (sterling) not only based on expected returns considerations,” one respondent said. “We also consider the high credit quality of the country, the liquidity of the (government bond) market and the diversification benefits of holding (sterling).”

Diversification of risk – not putting all your eggs in one basket – is usually viewed as sound strategy for any investor, but for professionals it has become increasingly important after the painful lessons of 2008/2009, when almost all financial markets collapsed in parallel.

One currency that most still don’t want to go near is China’s renminbi. The survey showed that reserve managers are still put off by the country’s capital controls, and by the fact that the strength of its credit system hasn’t really been tested – all the more worrying against the backdrop of a giddying rise in debt relative to GDP in China since 2008. Most of the managers surveyed didn’t think the renminbi would account for even 10% of world reserves for another decade.

That suggests that most investors see the U.S., rather than China, as the engine of the world economy for some time yet. It’s a point that won’t be lost in Mar-a-Lago later this week.