The Dollar: A Strong Buy 27 comments
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It may seem highly unlikely to depict the dollar as strong buy, or even as a simple buy, with so many investors, hedge funds and proprietary traders alike now heavily engaged in dollar-funded carry trades.
As a matter of fact the dollar is currently at record lows against the other major currencies (Euro, Pound, Yen). And there is an entrenched consensus that this situation may last for some time and that the green buck may even endure further losses.
The arguments for dollar bears abound: rising US public deficit and current account deficit, near-zero short term interest rates on the money market, both onshore and offshore (Libor), the over-extended Fed balance sheet, and weak prospects for the economy.
These arguments may bear some truth. Yet I believe that a great deal of the current dollar carry-trade rests purely on market sentiment.
Why so?
First, unlike the Japanese yen, the dollar is not the currency of an overbearingly export-oriented economy as is Japan. The US government has no incentive to keep the dollar too low for an extended period of time. For sure, a low dollar would boost exports but on the other side it is already hurting the status of the dollar as an international reserve currency, which neither the US nor the other countries are ready to accept. At least for the time being.
Talks about an alternative to the US dollar as an international currency are at best premature, and at worst nothing more than politically biased attempts by some countries like Russia to put additional pressure on the US government in the wake of complicated negotiations on WTO access or on the Iranian nuclear issue.
Second, as always I believe the US economy will be the first to recover among the major developed economies (as soft data already indicates), prompting the Fed to abandon gradually its policy of zero interest rate and to prepare the markets for a tightening cycle that could start somewhere between March and June 2010.
This will mechanically provide a support to the dollar, all the more that the other major central banks (ECB, BOE, BOJ) will have no choice but to keep low interest rates for a longer period than the Fed as their economies are quite not as resilient as the US economy. This is especially true for the Eurozone which may see a worsening of the recession in the coming quarters before eventually rebounding.
For quite a similar reason, US trading partners will not tolerate an exaggeratedly weak dollar as it symmetrically implies exaggeratedly strong pound, euro, yen, yuan and won. This would constitute a severe impediment to recovery for a number of export-based economies such as Germany, Japan, China and South Korea.
Finally, as the recovery gains steam in the US, foreign investors will rush in to profit from reasonable real and financial assets valuations. This would also provide support to the dollar.
In the long term, there probably ought to be an alternative to the dollar as the global economy becomes more diversified and less reliant on the US economy. But as John Maynard Keynes once said : "In the long run, we are all dead".
Disclosure: none
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This article has 27 comments:
I can't say for sure, one way or the other with any accuracy and I doubt that the author or anyone else without tens of billions of dollars available to invest could either. The author's argument is exactly that: an argument. It is one of several opinions based upon a portion of the data. But when all of the data is taken together, as the author points out in the third paragraph, it is hard to make a strong case for a sustained rise in the $US.
That could be sometime Never!
What is the alternative? Overpriced high beta gold? The increasingly weak countries backing the Euro? Japans Yen? Yuan? Oh, and dont forget Jim Rogers and the Singapore dollar.
So the exchange rate goes down 10-15%, thats not going to hurt the average American much. Seems to me to be a lot of whining and populist sneering. Whine about Obama, whine about Bush, whine whine whine.
People in America are begging for dollars and begging for jobs that pay dollars. Give me a break. I think we are a great country that is still the envy of the world. NYC Chicago Houston LA San Francisco Atlanta. Lots of great cities with lots of great businesses and great people.
The only unfortunate thing is about one third of our population seems to be paranoid, but I suspect this is a global condition.
"For quite a similar reason, US trading partners will not tolerate an exaggeratedly weak dollar as it symmetrically implies exaggeratedly strong pound, euro, yen, yuan and won. This would constitute a severe impediment to recovery for a number of export-based economies such as Germany, Japan, China and South Korea."
A weak dollar would hurt the exports in most other countries, but might actually *help* China. Though a weaker dollar might "imply" a stronger yuan, that won't be the case unless they are pressured into allowing it to float against the dollar and other currencies. If they leave it pegged to the dollar, the yuan will go down at the same time and in roughly the same proportions as the dollar.
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"The US government has no incentive to keep the dollar too low for an extended period of time. ..."
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I think there are a couple of potential problems with that statement.
1. Even if true, we may not have complete control over the matter. A lot of countries throughout history didn't *want* a devaluation of their currency, but they were either overwhelmed by forces beyond their control, or mismanaged what they could have controlled.
I personally think there's a pretty strong case that we could easily be in that overwhelmed position of so many of those other countries. Our trade deficits have been very large for many years. Our national debt is heading towards 12 billion dollars and growing at an unprecedented rate. Our total federal *spending* in 1973 was less than $246 billion. Our *deficit* this year is estimated to be $1.58 trillion. In other words, we are *borrowing* almost 6 1/2 times as much as we *spent* in 1973. And that's with interest rates near zero. If interest rates go up, our interest expense on that $12 trillion debt will obviously be jumping as well.
We are also exceptionally dependent upon foreign governments buying up all of this unprecedented flood of Treasuries to help keep us from monetizing the deficit any more than we already have been. Given that a number of countries and even the UN have stated that we need to move towards a market basket of currencies to replace the dollar as the world reserve currency, it would seem to me that we can't necessarily count on countries to continue ramping up their purchases indefinitely to support our currency when our trade and budget deficits are so seriously out of balance and have been for a long time, and are getting worse rather than better.
China, the largest holder of our Treasuries and other government paper has been loudly complaining about the continuing devaluation of the dollar and their fears that our economy is out of control such that we will not be able to stem the tide. Though they can't stop buying Treasuries cold turkey and tank their current portfolio and wipe out their #1 trading partner, according to an article on here, they have now dropped to 3rd place among countries purchasing our IOUs. The UK and Japan are in the top two spots. (1)
As some have noted, the UK is in even worse shape than we are and some of the rating agencies are already talking about downgrading their credit rating so it's rather curious that they come up with the cash to buy so much of our debt at very low interest rates even as it is dropping in value.
It has even been postulated that it may be a version of a check kiting scheme:
"Some people view the custody account as nothing more than an elaborate version of check kiting, played at the central banking level. ... In this game, Central Bank A prints up a bunch of money and buys the debt of Country B. Then the central bank of Country B prints up a bunch of money and buys the debt of Country A.
Both enjoy the appearance of strong demand for their debt, both governments get money to use, and nobody is the wiser. Except that the world's total stock of central bank reserves keep on growing and growing and growing, as reflected in the custody account, which will someday result in thoroughly unserviceable amounts of debt, an unmanageable flood of money, or both." (2)
Your scenario also depends heavily upon your expectations that the economy will recover quickly enough and strongly enough for the Fed to raise interest rates within 6 to 9 months and that we will be able to do so before other countries regain their footing sufficiently to do so as well.
Perhaps that will be the case, but I don't share your optimism that it will necessarily be so because that is how it has "always" been. I'm reminded of Bernanke's attempt to calm fears that there might be a housing bubble by reminding the reporter that housing prices have *never* fallen on a national level. Sometimes the future plays out differently than it has in the past.
2. I don't agree that the U.S. has "no incentive" to keep the dollar low. As our deficit and debt continue to balloon and our "unfunded" items like social security and medicare and so many toxic assets on our balance sheet, and so many "off the books" guarantees of banks, financial institutions, Fannie Mae, Freddie Mac, FHA etc., that the US might not be too unhappy to see a little inflation. It would help out the millions of homeowners who are currently underwater with their mortgages, the numerous businesses at risk of default on their loans, the banks who hold the mortgages and loans on said properties, and of course the toxic assets the U.S. has been buying by the hundreds of billions $.
It would also theoretically help our long term trade deficit.
Devaluation and the accompanying inflation would be unpleasant of course, but it might be the least unpleasant of the alternatives. It's a tax they don't have to vote on and most people don't know who exactly to blame.
The bottom line for me is that you may be right and currency traders might do well betting on the dollar at opportune times, and right now may be one of them, but longer term, I don't think the dollar will hold up well.
Endnotes:
1. U.S. Dollar Crisis in the Making
Chris Martenson
seekingalpha.com/artic...
2. How The Federal Reserve Is Monetizing Debt
Chris Martenson
seekingalpha.com/artic...
I am currently happily long UUP. So far I see no reason to leave that position. The overwhelmingly credit-heavy money supply is doomed to implode. It's now a falling safe, uncatchable. The relatively few $US left after that event will be much sought after by those with creditors to pay off (which will be almost everybody).
And yes, After That, we will have inflation . . .
Current account deficit has already increased significantly in the summer.
Government stimulus is never ending.
Lack of political will to stop money printing.
If some one is deeply in debt and can not default, the easy route is to devalue the debt away.
All of these are signs that the dollar is eventually toast.
The dollar is the global currency, effectively. It is used to conclude trade, and I just cannot buy arguments or stats that say the current account balance has gone up. I believe it has improved. And it will strengthen the dollar when trade improves when we actually recover.
A week dollar may help exports and current account balances, but in the long run is no good for anyone, especially China. Too many nations have valuable reserves. There is some incentive and maybe action to bolster the dollar.
That being said, the more I understand the SDR role, the more I favor pulling the dollar form the forex and replacing it with SDR. It appears to be a way of actually balancing our trade deficits and would eliminate currency speculation.
The US economy will NOT be the first to recover, it will be the last if it recovers at all. There are too many people in the country who have the 'I want it all NOW' mentality and are not willing to invest for the future.
"reasonable real and financial asset assets valuation" -- In my nearly 3 decades in the investment business, I have never seen a bigger bubble than US Treasuries and US stocks look valued at levels I last saw in August of 1987.
All in all, this article was a fine piece of comedic writing!
Really?? Has this author looked at a chart lately? None of the above statement is true at all.
The G20 is going to talk about getting countries to up their internal consumption. If this happened, it would tend to help the USD. If China, Japan, India, Brazil, Russia, Germany, etc. all upped their internal consumption, it would tend to increase the prices of their exported goods (increased demand = increased price). This would likely make US goods more competitive. It would also tend to make American made goods more attractive to Americans, which should benefit US businesses. If the US consumer then simply refrains from buying the now more expensive foreign goods, the US economy would be bolstered. The USD would rise. Hence the G20 talks (if they stay on the announced topics) should tend to bolster the USD, if there are any positive results to the conference.
As a secondary point, stimulating domestic demand for each country's products should help keep countries such as China and Japan from dumping as many of their products in US and European markets. This would tend to bolster the USD and the Euro.
I note Japanese economic data already indicate they are suffering from over production and deflation. The most recent figures from China indicate they are over producing. The China export figures were down -23% y-o-y in Aug. The Trade Surplus was down -45% y-o-y in Aug. The Industrial Production was up 12.3% y-o-y. Retail Sales were up 15.3% to counter this to some degree. However, those extra sales were virtually all stimulus driven (i.e. the government was giving out vouchers, etc.). When the stimulus is removed, the Chinese will have much greater production than they will have a market for. The European and US markets are slated for very slow growth for the next two years. All of the demand will have to come internally or from quickly growing economies. This seems unlikely. Roubini says the character fo the Chinese consumer remains unchanged. When the stimulus is over, the extra internal demand will be essentially over. This means China will have a lot of production that will have no market. This will lead to dumping. This may lead to a recession or to slow or no growth in China. The US and Europe will have to guard vigilantly against dumping. It seems inevitably to be coming. The Internal demand stimulus topics of this week's G20 would seem likely to benefit the USD and the Euro most.
I am very cautiously bullish on the USD with respect to a near term rally. The USD and the US equities are expected to move opposite each other in the near term. A fall in US equities would likely aid a rise in the USD and vice versa.
The first man to surface when a vessel sinks isn't necessarily the best place to be. I'd prefer to be watching from a life raft with a little gold.
> The dollar will only rise when the Fed decides to raise interest
> rate, when will that happen?
The Fed does not set interest rates. The market does that. When the Fed tries, thy get run over (look up "Operation Twist"). Check a chart of the (market determined) T-bill rate, vs. the (Fed determined) overnight rate.
Spot on. You're my boy.
How long the western world can get away with this scam is the BIG question.
My guess is as long as we don't run out of gold.
People are going to get pretty fussy when they show up for delivery and their is no gold or silver in the loading bay.
Bottom line? SA knows it's on top of the social cyber investing world. A target to lawsuits. They have to be careful. Yet, their stubbornness to allow their site fruition to incredible grandness is stifling.
....As clunky and cheap as their new spell check.
Oh well, get back here. There's simply no other website that you can do what you do, and we can do what we do.
Call to order from the Grand Chief of Humor and Disorderlyness!
Are you kidding me? What lobbyist paid you off to write such nonsense? Near term, maybe, and
within only mere days, thanks to the G-20. Long term, dude, you're grossly wrong, period.
However, if you want attention to your aberrant thinking, keep post articles, as I will blast you all along the way.
If this fabulous website can have such cheap assed spell check, why can't they have cheap-assed self-editing.
Dollar stronger? What? If the market tanks yep, but only for the short term. Everything else is a pipe dream. We are a broke nation and getting broker by the minute. Ben and Timmy printing press has not quit, our bond/treasuries sales are tanking, consumer gone *poof* and not able to return without jobs or under employed.
The dollar hasnt even returned to the depth of last summer levels yet, but we will, OH YEA, and shortly those levels will be in the rear view mirror.
Sorry, I cant buy into stronger dollar on your arguments with the other headwinds to contend with.