I'm just thinking out loud here bro...and i'm also interested in your opinion. What do you think is going to happen? If the FED is impotent, do you think the $ is going to crash on its own? What will precipitate this crash...the next inevitable terrorist attck, more U.S involvement like another front in Iraq, just a general flight from the $ into euros...
it took 2 YEARS for the $ to tank back in the mid 80's and i'd call that a crash, even if the deal does go down here and now, i still think it will take 6-12 mos to get seriously lower...maybe longer. I get the impression you seem to think that the $ is going to collapse overnight, and be back at the 1995 lows in a couple months. I'm not sure i see that happening short of a nuclear attack.
What's your scenario?... No need to get overly specific.
Hasn't the FED given other countries incentives not to sell their dollars en masse, through other more attractive vehicles/derivitives/bonds etc.? I'm certain i've read commentary to the effect that certain forms of arbitrage occur all the time on a national basis to support the global economy. I realize it's an increasingly risky shell game, but i'm not discounting the fact that it won't happen.
Pressure to lower overseas interest rates... possibility of more tax cuts...
The important point is that if the United States needs a weaker dollar to sustain its recovery, most of the rest of the world's countries need lower interest rates to sustain theirs. This requirement leaves Japan out in the cold, unless the Bank of Japan finally gets busy and starts pumping out liquidity at three or four times the current rate, as was required to end Japan's deflation in the 1930s. There is plenty of room for further interest rate cuts in Europe and Canada. In the latter, a macho central bank recently pushed up rates by 25 basis points as part of a premature show of confidence in Canada's economic recovery, which is tied closely to U.S. prospects. To quell a strengthening currency, America's other major hemispheric trading partner, Mexico, in April reversed a 60-basis-point rate increase that had been enacted in January.................................
Rx: Lower Tax Rates Instead of Higher Spending
Even if the dollar does weaken for a time, the Treasury and Congress can take steps to create higher growth and a firmer dollar. Lower tax rates would enhance both demand and supply growth in the U.S. economy, while pushing up expected real rates of return on investment and thereby helping to strengthen the dollar. Another $100 billion in tax cuts that could push next year's deficit to $150 billion instead of $50 billion would be far better than another $100 billion in wasteful spending on agricultural subsidies. Additional deficits created in the short-run by lower tax rates that promise higher growth are not a problem for global capital markets to absorb, since subsequent higher growth would erase future deficits.
Meanwhile, the Bush administration would do well to abandon the idea of a "dollar policy." The exchange rate is a price determined in global currency markets. Having a dollar policy that includes strong-dollar rhetoric suggests a willingness to intervene in currency markets should the dollar become "weak." That is not the stated policy of the Bush administration, so probably the less said about the "dollar policy" the better.
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