bobandted

The U.S. Dollar: A Six Month Outlook

Hey CLH, Japan runs one of the healthiest current account surplses in the world, while the euro area also runs a surplus, albeit a very small one. The UK and US have significant deficit problems and the depreciation of these currencies is essentially helping to alleviate the debt by pushing the burden back on their major trading partners, which in the case of the US happens to be Canada, Mexico and China.

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

The U.S. Dollar: A Six Month Outlook

A good analysis except the problem is that it is wholly focused on the US economy and why that may not support the dollar. This analogy has worked fine up to now because contagion had not been evidenced to any huge degree in europe, Asia or the emerging markets. That is now changing and the next 6 months will see a sharp downturn in the performance of European economies in particular, while emerging markets will not prove to be the sustainable 'miracle' they were perceived to be heretofore. A cocktail of flat or negative growth and rising interest rates (where UK and Euro area look to be heading) is a recipe for disaster and in any event only leads to protracted stagflation, which will deter long term investors, thus pushing down value of euro and pound. Also, flat or falling interest rates in the US accompanied by rising interest rates elsewhere is only going to exacerbate global inflation, as long as oil prices continue to race out of control. We are in a very unusual place at present and creative monetary policy, not borne out of the traditional handbook, is what is needed. It may take a monetary policy shock to prick the oil bubble, i.e. a short-term rise in US interest rates. The US economy would be better served by higher interest rates now than lower ones, because a coordinated Central Bank effort, to rein in the commodity train, is in the best interests of our disposable income and wealth protection in the present climate. Doing nothing and letting hedge funds and sovereign wealth funds drive up oil costs and force equities into the ground at a time when nobody is borrowing money is akin to letting an economy in the shape of a rabbit burrow deeper and deeper into a hollow that has no exit at the other end. You need to get the rabbit out of the hole and allow it furrow for a while to rebuild its energy, then take it to another field.

Bob