Hi Mrs. P,
WIth other things being equal a currency does come down in value one country lowers it's rates in greater
magnitude than it's trading partners due to the interest rate differential expanding in favor of the countries with
higher rates, however this is mitigated if the markets are expecting a capital appreciation in the Currency that
will dwarf the greater yield from the higher yielding currency.
The US Dollar has been so strong and has continued to be even as US short term rates have come down, due to
several reasons. The US is the only global superpower and I have mentioned a few times that I think that
this keeps a bid under the currency, This dovetails the issue that there are not many alternatives to holding
US Dollar's, Japan has been through an 11 year downturn, and has been in and out of recession, and has
fallen out of the International Investors favor.
Europe has the Euro which is still very young as a currency, and
there are questions about how well a common Central Bank can have a cohesive monetary policy, when the
member countries have divergent fiscal policies, as well as economies that are in differing states of both,
growth and competitiveness.As Hawk, has pointed out, the European economies also have larger unfunded
pension problems to deal with, and so this impacts the desire to hold Euro's.
The US Dollar has also been helped by the big equity bull market of the 1990's as it's brought in large amounts
of international money to invest in the US Market. So much of the Technology and Internet Revolution has
been developed in the US, that it's given the aura of the economy that produces innovation, is the most
globally competitive and thus is the place to be. And remember that the one-sided Gulf War Victory with it's
display of advanced technology in the weapons and equipment, coupled with the collapse of the USSR, as
lend credence to this idea that the US is the Place to be for the best combination of competitiveness, innovation
and safety.
One additional booster for the US Dollar is the budget surpluses that the Govt has been able to generate. It's
shown some fiscal responsibility by the Govt as well as it's reduced the supply of the best quality Govt Notes and
Long Bonds in the World. The concern of a reduction in these debt instruments, keeps the remaining ones in
greater demand,and keeps Foreign Capital interested in being in a what is becoming a scarcer asset.
US Inflation especially the CRB inflation has been modest over the past several years and especially the past
6 months as the CRB has come down, and Precious Metals, especially Gold and SIlver are still quite close to
multiyear lows and hence, have not created other compelling investment vehicles for Investing.
It can be argued that both US Govt receipts and the US economic strength has been inordinately strong the
past few years due to the US equity Market bubble and that the unwinding of this bubble has not hit the US Dollar
yet. At least not in a meaningful way, Markets are often driven for periods of time by consensus perception, and
We'll need to see More compelling Alternatives to create more meaningful USD weakness.
John |
