globalview99

How Low Can the Dollar Go?

The so-called fall of the Dollar is a head fake sucking in easy money who think that because of the huge deficits, the US will need to ratchet up interest rates to attract foreign purchases of US debt.

But that's not going to happen because the Japanese CB as well as other export-driven economies CB's (Germany, China, and other Asean Group exporters) upon looking over the precipice of continued falling exports (to the US) and unacceptable high unemployment, will intervene and buy up Treasury notes (thereby increasing exchange rates and strenghtening the USD) just to raise the buying power of US consumers which will raise their level of exports and keep people employed. It's a matter of politics and survival; and you can bet on it.

Just remember, the US consumer generates some 16% of global trade; if the Dollar remains weak and US consumers cut back on their buying (which has already happened) the economies of nations that export to the US are likewise affected. So given the choice of sitting on USD reserves and watching their employment rolls dramatically fall and pople on the streets demanding jobs and bailouts to pay mortgages, foreign governements will buy up US T Bills at low rates to keep the economy humming.

Conversely, the US government is delighted with a weak dollar as a natural barrier for US consumers to buy US goods rather than foreign goods. So the US is really in the catbird seat with a win win scenario going forward.

Beware of the 2008 Sucker Rally

There's just too much fear being pervaded and its got legs because the story keeps turning and twisting which makes for great news drama and ratings: sub-prime mess turned into CDO black hole twisted into liquidity crisis now the credit crunch with all kinds of fallout: mass layoffs in the mortgage and housing sector, foreclosures at all time highs, housing prices falling, consumers cutting spending, slow growth. recession, aagh.

There's nothing better than drama that has a kernel of truth to it and that is what this story has going for it. The housing sector represents some 12% of the economy and its not going to come to a complete standstill. There's going to be significant reduction in GDP due to this cumulative mess, maybe a reduction of 25% of its sector so we're talking about an impact of 3%. In other words, its going to take down the US growth rate from 4-5% to 1-2%. But fear rules the day and that's when fortunes are made.

Bill Gross: U.S. Already in Recession

Outperforming the market during the 2nd half of this year is no great feat; although the market's been on a roller coaster since August its just now re-approaching the levels attained during July. Gross' comments and the article is just another example of the media distorting the market and more grist for the fearful and greedy.