Dollar Could Be Headed to 13 Year Low Against the Yen

We are inching closer to a formal bailout plan for the Big 3 automakers and as previously suggested, regardless of the final outcome, the markets will cheer an end to the drawn out drama. The rally in equities Wednesday morning have driven major currencies higher against the US dollar and Japanese Yen, but it remains to be seen whether the improvement in investor sentiment will last. We are walking into a lot of potentially weak economic data on Thursday and Friday that could serve as a harsh reminder of the problems that the US economy faces. The PPI and retail sales figures should resurrect concerns that deflation and depression will hit the US.

The Treasury market is already pricing in the possibility of deflation and depression with yields in zero to negative territory for the first time since the Great Depression. Fed Fund futures are pricing in a 100 percent chance of a 75bp rate cut from the Federal Reserve next week. This would take US rates to 0.25%, making the US dollar the lowest yielding currency in the developed world. Although the greenback has remained weak against the Japanese Yen, if the Fed takes interest rates to zero, we could see the dollar fall to 13 year lows against the Japanese Yen.

Comments

[Toffe:]

Check out the EUR as well, the worlds next reserve currency after the USD falls off a cliff when it becomes apparent that you cannot just print new money to get out of your debts.

2008 Dec 11 02:49 AM

[Asbytec:]

Toffe, the euro will not be the world's reserve currency. China will not dump dollars.

First, the euro demographics make for a poor reserve currency. Europeans are getting older and will not have the economic might to retain reserve currency status.

Second, the EU cannot support huge trade deficits with China. The euro would go through the roof. The EU could not take the valuation and still maintain export competitiveness.

Third, China pegs it yuan to the dollar. It does so to maintain low prices exported to the US. If it released dollars and bought up yuan, the yuan would soar and export prices to the states would sky rocket. China also has a policy of not converting dollars to buy yuan, but to print yuan to buy dollars. How do you think they got so much reserves int eh first place?

2008 Dec 11 09:19 AM

[Ganesh Sastri:]

If you keep printing new currency you cannot expect its value to be stable. Experience with other nations has shown that currencies which have expanded and expanded or had trade deficits year after year have fallen by significant amounts. The recent rise in value of USD is surprising. I will not be surprised if the value of dollar suddenly collapses by 80% against stronger currencies in the world like JPY or precious metals whose supply is not as elastic as USD. USD at 20 JPY? Possible in the not too distant future.

2008 Dec 11 09:24 AM

[Asbytec:]

Ganesh, the Fed is printing power money. This is but a fraction of the global liquidity....in teh ball park of 10%, even with the recent injections.

The yen carry accounted for around 8% of global liquidity. This is now all but gone. Derivative money and the multiplier effect on this money...now winding down...just in the housing market alone is enough to bring the world to it's knees. And the housing market is but a fraction of total derivative money (75% of global liquidity) out there.

The dollar is disappearing into the very thin air it was made from faster then the Fed can compensate.

2008 Dec 11 09:32 AM

[Asbytec:]

The recent dollar decline is due to many factors. First, the libor rate has decreased demand for the dollar. And risk aversion has given way to yields, so the euro has become more attractive as the ECB signals little room to move on interest rates.

This will change. The ECB will most likely have to cut rates, despite the better than expected economic data. The new year should trigger a return to risk aversion.

2008 Dec 11 09:38 PM

[Asbytec:]

One more thought: Think the euro zone can survive valuation of it's currency in a global recession? Think again. It's rosy economic indicators will be hit. Downside risk to growth in the EU are real.

2008 Dec 11 09:58 PM