JasonC

Has the Dollar Topped Out?

The dollar has not peaked, it remains bid at rates to zero and will continue doing so. For the simplest reason - dollar debts will be repaid, many others will not be. Yen likewise, even more so, as a source of savings capital to the entire system. Oil will not be saved by OPEC, it could easily fall by half from here. This is about where it should have *peaked* even in the boom and bubble --- all the rest higher was utter craziness from the start, and merely destroyed about 10 years of future demand growth for oil.

As for what central banks are up to and what is behind the epic move in the Yen, the run has moved from first world banks, secured by now, to the third world and periphery, where destruction of bubble commodity prices and the reversal of speculative flows are smashing overleveraged borrowers. Argentina set it off, CDS on sovereign credits are the proximate fear of loss vehicle, and submerging markets generally will be smashed by this wave.

The IMF has already done deals for Iceland and Pakistan, and it has 3 others begging outside, and more behind them. The IMF has capital of around $200 billion to lend out, and individual cases are looking for $25 billion. You can survey the wreckage and do the math, but the long and short of it is, the IMF can only reliquify the sovereigns and keep the world trade system functioning, if its creditor-contributors pony up.

And Japan will lead the way on that. Japanese savings will go to the IMF, the IMF will lend to the likes of Poland, the loans will enable them to stay alive on their currencies and their sovereign debts without pulling boneheaded stunts like Argentina's or Iceland's. That will keep the sovereign CDS market from exploding.

Meanwhile, the true hard currencies that make it possible will continue to be bid. Dollar bonds even have rates on them --- just look at the state general obligations, or the financials (debt and therefore senior to even Uncle Sam's preferrred). Until all of those get back to well bid status, nothing else is worth anything.