US Dollar – Insights into what’s going on with it?
There’s an interesting article on FinancialSense.com discussing what the author believes is going on with the dollar right now, why it is strengthening in the midst of all the new USD being added to the money supply. It is at: http://www.financialsense.com/Market/wrapup.htm According to the author, his charts are strongly suggesting a big turnaround coming up. I’m interested in others’ insights into the dollar as well: what’s going on with iti, where it is headed, how long other factors (like unwinding of carry trade) can keep it elevated if it is on the way down.
Many folks I am reading suggest that Bernanke et al. will do anything to keep the dollar rally going. There appear to be several reasons why folks are continung to acquire dollars.
I remain glad I didn’t pile into PM; it looks like deflation for a while. My state (MA) is cutting jobs and services, folks are losing jobs and homes. I’m hardly an economist but that doesn’t seem like inflation. Prechter, with that weird Elliot Wave Theory, predicted a deflationary depression in his 2006 book "Conquer the Crisis" (I’m reading it 2 years too late!). He may be right, for the time being.
I’ve been watching the markets closely for years, bonds, currencies, stocks, futures, options. They seem seriously broken right now. There is insane huge leverage everywhere that is causing cascading margin calls and defaults. Definitely there are carry trades unwinding. I have no idea how much more will unwind. Its scary. The CDS’s apparently represent many times over the underlying notional values, which is insane. So there is X amount of money in the world, and 10X has been bet, obviously a lot of people can’t pay off on that bet. I think it might be less damaging if governments would void these contracts.
I think the dollar has to come down some time too, but I’m not going to try and guess when that will happen. Europe, Australia, NZ still have higher interest rates so more room to drop them, which will supposedly make their currency less valuable, at least thats the way all the trading programs seem to be written, and they are continuing to throw their billions/trillions behind that theory. What every you do you have to stay out of the way of the BIGS or you will get crushed.
(I’ll already seiously maimed myself).
Thanks for sharing your insights! I appreciate getting a chance to see things from your perspective, as someone whose been watching markets closely for a long time. I’m still relatively new at all this, and finding its a lot of work trying to get a handle on all the many factors affecting things!
Yeah, I expect to get hurt, too, because I have money locked into a retirement savings plan in US Treasuries at work. The plan doesn’t give me the flexibility to move my $ somewhere (potentially) safer without quiting my job, which would mean forfeiting a chance at my pension…which may end up being meaningless anyway!
I know, I am finding myself confused on how to read the conflicting factors (USD heaping into supply => inflation) and signals (commodities dropping in price, job loss, etc => deflation). I know a lot of people are asking Chris to talk more about inflation vs deflation as one of his post chapter 20 topics. I know I’d love to gain his insights into these topics!
the action the last few days—-$$ vs. yen—way down—and the $$ vs. just about everything else is very confusing to me…..yes $$$ vs euro makes sense —but everything else does NOT—-hoping some intelligent commentors on here will voice in or Chris will adress…..
I was hoping there would be a way to search for posts but I posted one a few weeks ago where I spoke about my views on the USD. I really thought that everyone had it wrong and again the pessimists were only putting up comments that described one side of the story. Yes, the US is in bad shape but in the game of currencies, the absolute level isn’t as important as the RELATIVE level. I believe that in my post, I began to look at currencies differently and wanted to start a survey that ranked them on the following metrics:
1. level of economic diversity
3. level of foreign investment
4. relative overall size of money supply
5. ability to use fiscal and monetary means to affect change
When you rank countries based on this criteria you get a very different view of the relative value of the different currencies. The US actually looks quite good and has a few things going for it like the size of the money supply representing the fact that they have been and still are the global currency. This also backs in to points #3 and 5. The Euro doesn’t measure up as well because of #5 as it is almost impossible to do any coordinated effort or game planning and th elevel of foreign investment isn’t as big as the US so more people have a vested interest in seeing the USD remain strong. Places like Iceland or Australia don’t rank well because of hmmm well all of points 1-5 actually. When I started to look at things this way, I went short the Euro and that trades worked out well but I’m down on my C$ trade but things here aren’t that bad so I expect the Canadian $ to rebound nicely by Q1 next year.
Interesting thoughts, Xflies. I have read some other folks’ stuff that talks about the USD actually being strong relative to other currencies and as a perceived safe haven in a time of crisis, despite its own problems. I find this area kind of confusing, like the defllation then inflation debate, as some folks think the USD will be strong near-term, because of its relative strength and perceived value as a safe-haven. But then they think the underlying fundamental weaknesses will kick in at some point (the fact that the fed is pumping so much $ into the system, devaluing the USD, plus our debt), and the USD will crash. I honestly don’t know which way it will go, but am trying to get better insight into this whole debate.
The dollar is in demand in the short term.
Firstly there has been a huge flight to safety from every asset class (stocks, municipal bonds, corporate bonds, commodities, forex unwind) into dollars. The US is considered the ultimate safe haven as of this point, rightly or wrongly. Thus most investors (small and international) are more than happy to invest in short term US paper at sub 1% rates. Co-incides with the large issuance of US short term debt to fund the ‘bailouts’.
In addition there has been a large scale deleveraging in the financial system. At the height of the hedge fund ‘era’ most fund were running 10% capital margins, and invested in primarily in commodites (the last bull market before this crash). The liquidation into dollar denominated funds has been very dollar positive.
Also remember most international institutions leveraging into the subprime market and credit default (CDX) markets have to settle or operate in dollar denominations. This settlement, or unwind of position is dollar demand because it is settled in cash.
The dollar being the world reserve currency, will be strong if there is any unwinding or move out of ‘risky’ assets. Of which there are trillions of dollars worth currently.
Fundamentally there is no strength in the US economy but currencies are not fundamental they are a form of exchange, and will move counter to form. All cannot go up and when one is the reserve it will be supported by the above factors. Commodities can however rise against all currencies, and will in this inflationary environment.
Thanks for adding your insights, Salis! It is no easy task trying to understand all the relevant factors and forces affecting currencies, and the US $, as the world reserve currency, in particular. So I really appreciate your and others’ insights!