The U.S. Dollar: A Six Month Outlook 34 comments
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The last six months was not one of the best periods for the United States Dollar. The value of the dollar declined by about 7.5% against the Euro, 1.3% against the British Pound, and around 3.5% against an index published by the Federal Reserve System (an index relative to currencies in a broad group of major U. S. trading partners). During this period,
What is the outlook for the next six months?
In my view, the outlook for the value of the United States Dollar over the next six months is not good. Right now, there are just too many things that are in the works, which do not favor an emphasis on a strong dollar. However, the question is, whether or not these possibilities are already incorporated in the current value of the dollar? My best guess is that the dollar will remain weak during this time period and will drift lower as more and more information reaches the market concerning the problems the world and the
The first such event on the horizon relates to the possibility that the European Central Bank will raise its base interest rate to combat the inflation that has now spread across
This possibility points up a real problem in world financial markets: the ECB, for example, is charged with one objective…to keep inflation under control. Its charter makes it completely independent of the political structure in the European Union. Thus, the ECB can pursue its objective of keeping inflation under control without immediate fear of political consequences.
Due to the independence of the ECB and many other central banks throughout the world, inflation targeting can be the sole focus of these organizations. This contrasts with the goals and objectives of the Federal Reserve System in that the Fed has two objectives it must focus upon…inflation and economic growth. These goals are not always compatible. Furthermore, if nations are “out-of-sync” economically with one another, as the
The possibility of conflicts, like the current one, is seemingly going to be an issue to be debated in the future. The French president Nicolas Sarkozy has already raised the issue of independent central banks and the problem of focusing on just one goal…inflation. (See the article in the Financial Times, “Elysee attacks ‘misguided’ policy of ECB.") This is the problem that ‘politicians’ always have with independent central banks, and represents the reason why central banks need to be independent of their governments. The current times are going to be ripe for political attacks on this independence. However, any such debate will not be a confidence builder for the support of strong currencies.
There are several other factors, which will be hanging over the foreign exchange market over the next six months. Perhaps the most important one is the influence, or, one could argue the lack of influence, the current administration will have on the economy and the financial markets should a crisis arise. There is only one thing, in my view, that the Bush administration can pursue aggressively in the last few months it is in office - it can aggressively move to prevent further financial collapse or economic dislocation.
This is the only thing the United States Congress will allow the Bush policy makers to do. Anything of a more positive nature will be postponed, such as the efforts of the Treasury Department and the SEC to coordinate and share data collection. The Democratically controlled Congress expects to see a Democratic President seated in January 2009 and expects to hold greater majorities in both the Senate and the House. They are not going to allow this administration to initiate anything in its last few months in office.
Administration policymakers are very much in a dilemma. We have recently heard Fed Chairman Bernanke and Treasury Secretary Paulson speak about supporting a strong dollar. Paulson “reaffirmed the importance of a strong dollar” in
The economy is also going through its adjustments and there are many uncertainties connected with how strong or weak the economy will be. On one hand, the
The uncertainty with respect to how the economy is going to evolve connected with the inability of the “lame duck” administration to do much of anything leaves the candidates for president in an awkward position. The state of the economy is certainly going to have an impact on the election, but the issue is, what approach to projected policies should the candidates take? The candidates are currently presenting programs representing what they would do if they were elected president, and the economy was not a problem. We are hearing nothing about what they would do if the economy is not in very good shape, or if the economy is “in the tank.” We have no idea who they would install as cabinet members or advisors. Consequently, we have no idea about how either candidate would respond to the issues now facing the financial world over the value of the dollar.
Thus, the outlook for the dollar over the next six months is for little or no support to come from the
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This article has 34 comments:
Thank you
Jim Rogers RJI commodity index and China (remimbi) stocks -go JST
dan
Here's a pretty good podcast on what to do during this market- check it out. www.greenfaucet.com/sh....
One of the main problem is that the classic safeholds in this market: coal, steel, bulk shipping, agriculture- are becoming less safe.
I am beginning to see the silver lining of this cloud, despite the obvious pain coming. We will know the truth, have our bad tipping point, deal with any military misadventure on this globe as a result and move on. Many in our lifetime will finally see a true global consensus.
Future generations will get off this planet, evolve into energy and explore our entire universe in less then a second. And we can say, we were there at this biggest and final of all major changes leading up to this. In-between, I will display the code of honor I learned from my mentors and run toward the problems head on with my symbolic sword and physical one if I must. We'll no doubt be called the second Greatest Generation. Keep in mind the generation of the Roaring Twenties who by 1946 had grown up into tremendous, responsible leaders and led our nation into one of the greatest times of prosperity and freedom ever known.
Go to silver, folks. Heck, any commodity will do. It's not that you'll necessarily be *making* money (in relation to what it can buy), but you might stay afloat as everyone else drowns in the quicksand of cheap, freshly printed greenbacks.
But Simple gets a little tougher in a recessionary environment.
Article gives a simple straightforward assessment of what has and --will--pass for currency of the realm, now and tomorrow;
Things are getting exceedingly difficult!!
a) have a job WITH inflation
b) be unemployed with ZERO or low inflation
The world is not as black and white as my 2 choices above, but let's simplify things for the sake of argument. I'd prefer "a", as in 'b" I won't buy oil...sure... but I won't be paying my mortgage either.
One can pump up all he wants ECB, but what good is a strong EURO under a collapsing or recessionary economy? The "independence" the author mentions above from central banks and goverment might be good on paper, but how effective is to have a monetary policy APART from a fiscal policy?
Many analysts argue that the EURO will flop simply because of this reasons. Of course, you and I know analysts are never wrong... but in this case the contrarian point ought to be at least thought provoking. Time will tell.
Actually a lot of this inflation has already taken place in the devaluing of the dollar relative to other currencies. Today the dollar actually went up when the ECB raised their interest rate (and the US payroll numbers were bad). This could be the old up on rumor down on news scenario. Alternatively it could mean that the global community approves of current Fed policy (more so than ECB policy). The European banks are actually having a lot of the same problems the US banks are having. However, the ECB apparently thinks the European economies are strong enough that they can weather this current storm without help. This should help the US economy. It should make the European businesses just a little bit less competitive than the US businesses. Perhaps this is why the dollar was up today. Perhaps the dollar is stabilizing or even reversing course now. This would be good for the price of oil, which is now the major drag on the US economy. If we can conserve oil, that would help too.
Still the US needs to produce more oil in the near future. Apparently President Bush is trying hard to help oil companies accomplish this goal. Perhaps Congress should listen to him this time. Would it be better to live in a US still owned by Americans, albeit a very tiny bit more polluted by offshore drilling; or would it be better to be poorer in a country more and more owned by foreigners, with a tiny bit less pollution. This seems like a no brainer to me. The technology for drilling has improved dramatically since the offshore drilling bans were passed. It is time to reevaluate our position based on our current hard realities. Imported oil at the current prices is the most toxic factor facing the US economy. We need alternate energy as quickly as we can get it. The government really ought to subsidize it as much as possible. We are paying a huge price by importing so much oil. The trade deficit due solely to oil importation should be more than $500 billion this year alone. If you thought the stimulus package helped, think how much this huge deficit is hurting. It effectively takes that much money out of the US economy. We also need to do away with as much oil importation as we possibly can. Producing more oil is really the only way to do this.
When the U.S. pulls out of Iraq, the dollar will start to rise.
Bob
We are in bigger trouble than at any in the last 50 years..........
Dollar will probably stay the same with some upside. I dont see the gov. debt as a problem (Japans and europes debt is much worse). However the debt of the American people is a problem.
The weak dollar however can no longer be looked at as an advantage in a trade environment for the most recent data tells us that although US exports hit a record in April, the trade deficit actually widened, because imports grew at a faster pace thanks to the huge increase in oil costs. May and June are not going to offer any comfort. Thus, although exports may be rising thanks to US producers being more competitive through a weaker currency, if it also means import costs rise by a higher amount, then the economy is worse off. The current surge in oil costs coincided with the Federal Reserve's aggressive rate cutting policy and having been responsible for generating the spike, they will probably need to be the ones to crash it.
Bernanke has little credibility with forex markets, given his inability to follow up on tough verbal warnings he issued last month, being 'attentive' to the dollar and such. He is no longer believed in terms of what he says, so we are now at a point where only actions will work. It is a great pity the Fed doesn't act with the same intent and urgency shown to bail out Wall Street credit institutions last Fall, to now help Joe Soap on Main Street, whose wealth is being withered away day by day, thanks in no small part to the repercussions caused by the Fed's rather hasty march to lower interest rates.
Bob B
In other words, self-dealing bankers get to control the economies of the world.
Want to fix the dollar?
1. Abolish the Fed and go back to gold backing.
2. Balance the US Federal budget.
3. Privatize Social Security.
4. Abolish Medicare.
5. Get out of Iraq.
6. Unregulate the US economy so that it can at least compete on an even footing with the other un-regulated economies in nations where all our jobs have been going.
Now that the economic bright boys on Wall Street are losing their jobs, maybe we'll be able to get some consensus on jobs. "Financial innovation" my ass. "Service economy" my ass. Let's make stuff and sell it overseas for foreign exchange reserves.
1. Abolish the Fed and go back to gold backing- not sure this is a viable solution at least in the short run.
2. Balance the US Federal budget- how? Let's face it- the politicians are going to have to bite the bullet and implement tax reform starting with raising taxes. I know this will raise an outcry those from those who will have their ox gourd but even Buffet and Soros who are capitalist have stepped forward and admitted that there is going disparity between the haves and have nots in this country. Tweaking the tax system to get our National debt under control will strengthen the dollar and curtail inflation.
3. Privatize Social Security- can not agree with this solution. It be a wind fall for those in the investment field but unless there is a mandatory program for SS, Americans will not fund any safety net no matter how trival it may be. I recognize that SS is not a life support system especially the way it is currently set up, but at least it provides something to those who don't know how to manage and save for retirement. If anything, the collection system needs to be revamped to properly take into account the spiraling inflation that is not measured accurately by our BLS.
4. Abolish Medicare- again a crazy idea. If anything, this needs to be resolved with a system that provides for the those who are not covered with medical insurance. I would support a duel system of private insurance and one government funded.
5. Get out of Iraq- how?? I agree but one cannot leave there without filling the vacuum that would be created by our leaving. If anything, the situation in Afghanistan is deteriorating. So leaving Iraq doesn't mean we are goig to be out of the area. We had no business being in Iraq and the consequences of our conduct never really measured by those who put us there. But, we are there and the situation needs to be resolved properly. It appears progress is being made and a government may be coming together.
6. Unregulate the US economy so that it can at least compete on an even footing with the other un-regulated economies in nations where all our jobs have been going. Not sure this is the answer as I look at what happened when we did that in the Airline industry- now in collapse, the steel industry, the communication industry, the banking and financial sector ( total collapse had the Fed not stepped in to save us in the BSC situation and we are not done yet), and what about the energy/ utility industry that brought us ENRON. Government has a role to play but it too must be controlled in what thye do and how they do it. I don't have the answers but I know from life experience that wild swigs occur when things are left to there own ends.
Nothing will get fixed as long as people like you that it is too hard.
You have no faith in people at all. You believe they cannot take care of themselves and need someone superior (like yourself?) to care for them. How did we survive until now? How did humans make it this far? Nanny state is a new creation, built on the notion that people will take care of themselves UNLESS THEY DON'T HAVE TO. If we had a society where people had to take care of themselves, they would. How did we live without Social Security and Medicare? Humans are 40,000 years old, Medicare is significantly younger. We can live without it.
How to get out of Iraq? 1. Put the troops on boats. 2. Sail the boats back to USA.
The Fed did not save us from Bear. The Fed caused inflation, the IB's got greedy because they believed that the Fed had their backs. Why did they believe this? Ask Fuld and Dimon, they are on the Board of the New york Fed. Had the Fed not existed in the first place, and had we been on a gold standard, Bear would never have been able to get so big as to threaten the entire system.
There is **no** reason to bottom fish these days. When the market turns around, it is not going to blow up because there is so much supply, both stocks and bonds, that these holders of those assets are more than happy to sell on any pop.
Remember, the time ratio of bull to bear markets is roughly 3:1. You'll have more than enough time to make good, in a better risk environment, money.
1) If the dollar is to survive, interest rates must rise. If this happens then stocks, which are in bubble land due to low rates, will crash like 1980s or maybe even 1929-1932. So, buy long term deep out of the money puts to cover you there.
2) If Ben B decided to keep his word that he will not follow in the footsteps of the 1929 fed then you need to get out of the USD. In fact, there is no such safe currency if the USD loses its spot as the worlds reserve currency because Euros will have to be printed like crazy to take up the slack in the market place. The safe hedge there is gold.
So, buy gold and hedge this with long put leaps. IMO you will end up making money on both sides of this trade because the US debt is so high that the USD probably can't be saved.