Blogger's Take: The US Buck
It’s been 11 years since the last canaries employed in British mines were made redundant. Similarly, it's been six months that the dollar has been de facto redundant in an analogous financial market role.
Global liquidity continues to drive equities in jaw-dropping style with investors largely ignoring the anxious tweet-tweet of the USD. The US economy might indeed make a faultless soft landing. Yet the future is not as riskless as equities imply; and the dollar is prudently reflecting its own loss of that religion.
-Rawdon, Capital Chronicle
Young adults may want to seriously consider how they might look in a giant mouse costume. After the dollar's slide in the last two months and with its bleak prognosis going forward, some of the best career opportunities in the U.S. will likely be found greeting visitors at Disneyland - guten tag, ni hao.
-Tim Iacono, The Mess That Greenspan Made
~~~Economists, investors and analysts alike have been calling for a structural adjustment in the dollar. The most common assumption is that the deficits (budget, trade and current account) will eventually produce a lower dollar. The most recent decline in the dollar, especially against the Euro, therefore looks to many as supporting this thesis. It has become rare to find a dollar bull and even harder to find arguments supporting a stronger dollar. We would caution those looking for a lower dollar to at least look at the contrary case.That being said the potential for a dollar adjustment lends support to the argument for investors to maintain globally diversified portfolios. That includes having positions in a range of non-dollar currencies as a hedge against a dollar decline. The ETF revolution has made investing in currencies, and foreign equities even easier and cheaper. Indeed one could argue that holding currency positions is in a sense a “natural hedge.”
Consumption, for each of us, now includes a significant import component. Holding non-dollar positions can therefore help preserve buying power.We don’t know for certain whether the dollar will continue to lose ground against the world’s major currencies. What we are certain of is that having a portion of your portfolio overseas, and unhedged, remains the easiest way to maintain real purchasing power.
The dollar decline matters. It is generally a negative; the benefits to US based multinationals notwithstanding. I am not in the camp that thinks the dollar will collapse causing some sort of economic Armageddon. As many others have rightly pointed out the dollar is too entwined in the global economy in terms of things bought and sold in US dollars and the ever growing reserve of dollars held around the world.
That being said there is a fairly clear visibility to the dollar sharing its role as world reserve currency with other currencies, like maybe the euro or a euro equivalent from Asia that we might see in our lifetime. Last spring both Norway and Iran explored trading oil in euros. We have heard about many countries either diversifying the reserves announcing plans to diversify in the future or dropping hints about diversification. Any action along these lines will be done in such a way as to try to minimize market dislocations. Dubai and UAE can just sell dollars without moving the market, China would not really be able to sell without hurting its own interests but could buy fewer dollars in the years ahead especially since they have allowed some appreciation in yuan and seem poised to allow more in the future.
I have been writing about this scenario on my blog for a while. I view this as happening over a period of several years with the result being a generally lower dollar than we are used to and generally higher rates than we have become accustomed in the years since the tech bubble burst. This would not be panic but merely discomfort.
-Roger Nusbaum, Random Roger
The US dollar is approaching support and once again bearish sentiment is rising.
A Recent cover of the Economist highlights this renewed bearish sentiment. Magazine covers in general and Economist covers in particular have a nasty habit of marking major turning points. Remember that it was "The Incredible Shrinking Dollar" cover of Newsweek that marked the bottom of the US dollar in 2005 to within a week or so.
We also see big specs plowing heavily into both the British pound and the Euro, and an unwinding of those trades (which I think will happen) would be supportive of the dollar. On the other hand, we still see a carry trade in the Yen and Swiss Frank which has negative implication for both the US$ and US equities if and when that trade unwinds.
Of course the real situation is that all of these fiat currencies are eventually doomed as compared to gold. In the meantime the odds of more rate hikes by both the UK and Europe are probably overdone and it is interest rates differentials that matter most. If the expectation is for more hikes and Europe and the UK and cuts in the US, and that expectation does not happen, look for the US$ to rally. It may rally anyway based on current sentiment. To put my neck on the line I suspect the US$ will hold the 80 level (or perhaps do a headfake below then reverse). Longer term, the US$ is indeed toast but that can be quite a ways off from here.
-Mike Shedlock, Global Economic Analysis
Europe looks set to raise rates Thursday, but ironically, this now may little effect, as the bogus “conundrum” is in full effect. In other words any uptick in rates simply is used to set that currency up as a target of carry, from the low interest currencies like the Yen and Swiss Franc. This has gotten so pervasive, that I even wonder what the effect will be, when and if, the Fed signals (as I expect) on Dec. 12, that the market has it all wrong about rate cuts. Same question needs to be asked, if the BOJ moves in a coordinated attack on Dec. 19th. Although Riskloves have been warned, there is a fair chance that the effect will once again be nominal.
I’ve been increasingly asked how the end game of this lunacy plays out. One prospect I’ve theorized on is the collapse of the carry trades. The problem with that one is that it seems the increase in the Swiss Franc and the Yen needs to be quite large, a la 1998. A rally in the Euro against the Yen and Swiss actually benefits the Riskloves, and that is what’s happened of late.
This allows Riskloves to stem any losses they experience shorting yen against the USD. In other words, the Yen needs to increase substantially against all the liquidity recipient currencies, not just slightly against the USD.
Although the carry trade will surely blow up, I’m not sure if it’s the horse before the cart. As or more likely will be that some fusionable material blows this Rube Goldberg machine up. There is a whole universe of Ponzi finance units as candidates for it. This is something that could happen at any moment, and out of the blue, like an earthquake. The other scenario is a series of smaller quakes as unsustainable credit spreads on the dark matter just start blowing steadily out when Joe Soccer Mom’s debt servicing checks fail to arrive in the mail (see yesterday’s blog). That’s more a gravity theory, and recognizes the obvious– that shit actually happens when debtors have no savings, and lose jobs. I really don’t see the wait as too long on that score either. In fact the Boyz are already late adjusting credit spreads on that one, and have catching up to do. If you are a bear, that would be the preferred outcome, as there is lots of gradual mileage to play on the downside. May not be so lucky though. Could just happen in the middle of the night, as one huge thud.
-Russ Winter, Wall Street Examiner
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It means everything will be more expensive and everything that we own will have less of intrinsic value (less of purchasing power).
Posted by: V L | Dec 6, 2006 9:19:00 PM
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