The Weak Dollar Crowd Is Too Confident 22 comments
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A warning to all you exposed to the dollar carry trade, either directly or indirectly. A group which includes:
- Anyone borrowing in USD to buy short-term assets in another currency.
- Anyone borrowing short-term in USD to buy long-term USD assets, i.e., every U.S. bank.
- Any U.S.-based company selling their product to non-USD consumers.
- Anyone invested in a U.S. company who is borrowing short-term in USD and buying long-term assets and/or selling products in non-USD currencies. That is, anyone long U.S. stocks or U.S. corporate bonds.
- Any U.S.-based investor long any non-USD asset, i.e. any investor in foreign stocks or bonds.
So basically anyone holding anything other than cash.
Below is the intra-day chart on USD/EUR from this past Monday:
The foreign exchange value of the dollar has moved over a wide range during the past year or so. When financial stresses were most pronounced, a flight to the deepest and most liquid capital markets resulted in a marked increase in the dollar. More recently, as financial market functioning has improved and global economic activity has stabilized, these safe haven flows have abated, and the dollar has accordingly retraced its gains. The Federal Reserve will continue to monitor these developments closely. We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial stability.
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-confidence in housing will be shaken as people will not be sure about the direct going forward.
- interest payment on both persoanl and national debt will go up.
- economic growth will be slowed and unemployment rate will rise further.
Wishing someone to do something and someone actually being able to do that are two different animal species from two different planet.
If all children in the world would not visit any internet games or Play stations, and focus only in academics, their GPA will go up significantly. ( will they?)
If I shall wake up everyday in the morning, and work out two hours in the gym, while skipping every weekdnend's beer drinking, I will be ripped like Rocky Balboa or Bruce Lee. (but I miss out the party with friends, and social life, so will I?)
To be more clear, if I work during the day time, skip sleeping, and work a second job at night, my income would increase by a substantial percentage. But is this possible and if possible how long will it last? I will be so tired during my day job that I will be fired very soon, and sure I can work on my lower paying night job all the time!
Thus if the economy and unemployment rate and both personal and nation debt level does not fit nor tolerate an increase in interest rate, why mention the possibility of all the kids stop touching any playstation and focus only in academics or the dim possibility of me skipping weekend drinking and only visit the gym to stay lean like Rocky in his prime or like Bruce Lee!
Btw, what species of animal is that from which planet?
too early in the recovery. That is, if you believe the economy is actually getting better. I don't. Watch the employment reports. By the end of February the jobless rate will reach 11%. Why? Because a mediocre retail holiday season will force businesses to further reduce staff (and not just the temporary help they hired for
November-December.) Non-retail companies are already announcing plans to fire workers before year's end and into the Spring.
One of the Fed's stated missions is achieving full employment. Raising interest rates to strengthen the dollar will have a huge negative downside with respect to that goal and won't / can't happen for some time to come.
On Nov 19 12:27 PM woollyB wrote:
> I agree, for those of us who are staying safe, the forthcoming dollar
> rally is going to be fun to watch.
The noon spike shows just how jittery things now are.
So, the ones borrowing the US dollar to invest in commodities or non-dollar assets, are ALWAYS in the minority. There might be $1 trillion worth of dollars borrowed in the US dollar carry trade, probably way much less. But there are at least $13 trillion US dollar cash lended out by investors, mostly to the US government, in the form of $12T worth of US treasuries.
These bonds or debts holders are absolutely in the majority and they are in utter danger of losing everything, while the US dollar carry traders, who are in the absolutely minority, stands to profit from the collapse of the dollar.
Mr. Yen said him Im broke,
then the guy jumped to China,
and they told him: credit nope.
So he called is barbed printer,
better old on on the dope.
Party is over for some timing,
till our owners give us hope.
Short those bars and balck refined,
tell our gold men there is no hope.
Certain folk you got the tough job,
just when party came to stop.
I dont envy your position but you
still have some good hope:
balance budgets and bring soldiers
to the peace of moms and pops.
I do hope long term the US government gets fiscally prudent and doesn't past another round of stimulus and the Fed does attempt to normalize interest rates and quash the abnormal liquidity in the market. However, I think this is but a dream.
In the end the Federal Reserve is like a politician. It likes dispensing apparently free money to it's constituents (the banks) at the cost to the rest of Americans. That is how it derives its power. To assume it will opt to weaken its power is like asking the Federal government to pass a balanced budget. It may only happen once in a lifetime. And we know we already saw that when Volker was in power.
What does the US want....trade war. with China because of the cheap Yuan...The US wants to win a sales war, ...sell products...sell USA products....Jobs are the key to the recovery.....
So the dollar must stay low.....
The Obamanomics team say Its Jobs Stupid...
Look at the CHF....they keep going lower....they must keep the CHF low as they must be able to sell their goods to the EU.....
The CHF does not want to be overtaken by the safe haven status...
The USD dollar will stay low for the next......year ...
Fed has no interest in a strong USD as long as the economy and employment are weak,AND inflation stays low.
FX traders realize this and thus continue to sell the USD, largely for carry trades (ie sell low interest USD buy higher interest AUD or EUR).
Thus the USD's only near term hope for a rally is a stock pullback, which raises the fear level and causes these carry trades to unwind and sparks USD purchases (a simplified explanation, I know)
Stock pullback should come at SOME point as part of a normal test of support, never mind the irrational nature of much of this unjustified rally.
However, timing the markets is tough, so don't start going long USD and shorting risk assets UNTIL you see confirmation of an S&P 500 pullback. See my daily instablogs and weekly outlook instablogs (on Sundays) for alerts on this and overview of global asset markets.
They could strengthen the US Dollar by further shortening this, perhaps even returning to a true "overnight" model.
Note: real investors and traders; "all bet are off (as in -kilter)".
Fed's policy is based on the premise that a return to growth will happen with a controlled decline of the currency.
Unfortunately, things never happen as planned in the real world and the market may force its hand. As it is usually the case, this will happen in a time of weakness.