Lou Thomas

Forex Wrapup: Dollar Benefits As Traders Focus on Weak Economies Elsewhere

Aceman, your comment turns everything upside down.

First of all, as I mentioned, as recently as July 30th Grace opined that the dollar rally was likely to stall just as it really took off, so based upon what should we watch her for further news?

Secondly, as everyone knows and agrees, if Trichet continues to increase interest rates, that favors the Euro and puts downward pressure on the USD, not the other way around as you have stated.

Thirdly, yes, the European economy would be able to export more if the dollar is stronger, so I agree with you there, although of course a stronger dollar means that the U.S. can continue to run a deficit better, which feeds inflation in Europe, and that is an offsetting concern that may make the ECB, whose mission is to control inflation, take a hard line on interest rates.

Finally, the more inflation China has the less inclined it will be to continue supporting the dollar, which is the most important single thing that has kept the dollar afloat at all for so long - so Chinese inflation is not good for the dollar. One could argue that the present decline of commodity prices helps to *reduce* Chinese inflation, and therefore gives them more room to support their exports to the U.S. by supporting the USD, and that would be a reasonable argument, but you seem to have said the opposite.

And, the U.S. does not really benefit from a rising dollar, because as the world's largest debtor nation, the less its currency is worth, the lower the value of its outstanding debts to others. Inflation always favors debtors, although of course if they have to borrow more the cost of borrowing will go up.

Forex Wrapup: Dollar Benefits As Traders Focus on Weak Economies Elsewhere

"Weak US economy to pull the dollar down? That’s an old story."

It's not "old;" it's a magazine story that is being serialized in installments. Wait for the next one, coming quite soon. The suspense is in wondering what it will be? Fannie insolvency? Freddie insolvency? Housing values? Consumer spending? More writedowns beyond subprime in Alt-A, credit card debt (up $15 billion in July), auto loans, student loans? Hundreds of new bank insolvencies, leading the FDIC to appeal to the government for a bailout (it had only 53 billion, and Indymac alone took about 23 billion up front, all of which but 4-8 billion will be recovered, but not for 6 years or so, so they could easily run out). Stock values as consumers shut their wallets? Credit double crunch as the U.S. government pumps hundreds of billions into the deflating housing bubble by bailing out the GSEs and maybe the FDIC, and has to issue more treasuries at very high interest rates to fund those bailouts? Flight of foreign capital from GSE bonds and treasuries?

It's like waiting for the other shoe to drop when your upstairs neighbor is a centipede. Yeah, it's "old" like Europe is so "old world" and dried up, as Bush tried to claim. We only like "new" stories here, because here in the good old USA we have no historical memory. If something has already happened, then, as the song goes, "I said it once - whyyyy say it again?!"

I'm truly shocked that you could attempt to offset all of the above with some vague words about rate expectations changing. Based upon misreading Trichet's raised right eyebrow - how prophetic. Do you think that these interest rate changes rule the economic world?

And what in the Eurozone compares with the above? U.S. problems are orders of magnitude greater than those of the Eurozone.

Sorry - the dollar increase is an anomaly. You yourself predicted that the dollar's rise would not continue on July 30th, in your article "Dollar Rally Likely to Stall." This present article shows that you have no foundation in analysis - your articles are blown about by the winds of exchange rates, and your feet no longer connect with the ground.

Dollar Wins on Euro, Pound Weakness

Fascinating discussion--especially the comments of JasonC. I'm still trying to make sense of this, but here are a few questions and observations:

shadowstats.com's alternate data series shows a continuation of the suppressed M3 figure, and that has indeed fallen off somewhat in the last few months, although overall the trend is *hugely* upward. My thoughts on this would be that it reflects the destruction of balance sheet and now even some off-balance-sheet CDOs, etc., that are being marked to market instead of to model at last. Note the National Australian Bank having written down to zero over $1 billion of such junk, all based on U.S. mortgages, and Merrill Lynch's subsequent writedown of billions of its own such assets to 22 cents on the dollar (see smirkingchimp.com/thre...).

Such admissions should be reflected as a reduction of the money supply, right? Deflation and deleveraging will, in fact, reduce the money supply, all other things being equal.

Of course, the Fed has been backfilling this furiously by lending out treasuries to troubled institutions in exchange for their CDO junk. And that's where I have to ask JasonC: Won't these treasuries, and the ones that the Fed has sold, be used for additional money creation on margin that the CDO junk could not (any longer) be used for?

So, we do have destruction of wealth, and hence money supply, but we also have some re-flation from the Fed, and now from the Federal government with the $300 billion credit line it recently extended to Fannie and Freddie. So, we have a collapsing bubble and desperate attempts of various windbags to breath new life into it.

Considering, though, that this bubble is tied to major asset classes that have been supported by foreign investment, how long will it be before those foreign investors flee en masses from U.S. equities, Treasuries, Fannie and Freddie bonds, etc.? And where will the $7 trillion in cumulative U.S. trade deficit end up, if not in Sovereign Wealth Funds buying up whatever is not nailed down here, and then on to the forex markets to get less degraded fiat currencies, at the expense of the USD?

The export-oriented Asian economies supported the dollar only so long as the U.S. market for their goods was strong. A recression here means less incentive to prop up the dollar, and more incentive to prop up the Euro and to sell more to the Euozone instead.

Anyway, intuitively, you have to ask yourself: how can a collapse of the U.S. economy be good for the dollar?

So, why is the dollar holding its own against the Euro for the last few months? I cannot see any explanation other than active intervention by central banks terrified that the dollar will collapse in an uncontrolled manner. The worse the U.S. news, the better the dollar gets.

As I said, still haven't figured this one out...but there are plenty of other shoes to drop on this centipede of an economic calamity, and eventually one of them is going to hit the dollar right in the middle of the forehead.