Hi Marek, <<Since the markets had not bad day today & yesterday and dollar still lost 2 full points last 48 hours action speaks for itself.>>
... Yup, and G8 did not, of all matters, speak publicly about the latest but important currency trends, deliberately, I think, and so I focus on:
Message 17666092
"My short term (to end of year?) non-action plan involves nothing more than watching the currencies, and looking at precious metals ..."
Chugs, Jay
stratfor.com
Blow to U.S. Dollar To Ripple From Asia to Europe
26 June 2002
Summary
The already weak U.S. dollar took a direct hit June 26 after news of a multibillion-dollar accounting fraud at WorldCom emerged. An expanding crisis of confidence over the health of U.S. corporations will threaten fragile economies from Asia to Europe.
Analysis
The already weak U.S. dollar plunged in early trading June 26, nearly hitting parity with the euro and dropping to eight-month lows against the Japanese yen. The global stock markets followed, with steep declines in Asia, Europe and the United States.
The latest fly in the economic ointment was the revelation of a multibillion-dollar accounting fraud at U.S. long-distance company WorldCom, where executives said corporate profits were inflated by $3.8 billion. The dollar's slide was aided by U.S. President George W. Bush's statement at the G-8 summit in Canada that the "dollar will seek its level based on market forces," signaling his administration is unlikely to intervene to keep the currency strong.
Though the U.S. economy remains fundamentally strong and should continue to recover, the latest revelations have further tarnished the reputation of U.S. corporations and will deepen investor concerns about the underlying value and reliability of U.S markets. This will further depress the dollar, with implications that will reverberate around the globe.
Japan's export-led growth could stall under the weight of a stronger yen, and its growing interventions will raise tensions with other Southeast Asian states, renewing talks of competitive devaluations. An overheated euro also could threaten Europe's nascent recovery, especially in Germany. Meanwhile, there is a distant possibility that a collapsing dollar could torpedo the U.S. recovery.
Executives at WorldCom, the second-largest long-distance company in the United States, admitted June 25 that the company had claimed regular operating expenses as investment over five consecutive quarters in 2001 and 2002. This allowed the heavily indebted company to overstate earnings by $3.8 billion, artificially inflating the company's value. By comparison, Enron's infamous accounting tricks overstated profits by only $600 million. The U.S. Justice Department will launch a criminal investigation against WorldCom, and the company plans to lay off 17,000 employees, or 28 percent of its staff.
While the specter of bankruptcy looms over WorldCom, a much larger cloud hangs over the U.S. corporate landscape. WorldCom's admission further tarnishes the reputations of U.S. corporations. New scandals add more credence to the view held by a growing number of global investors that Enron's collapse was the tip of a larger iceberg of fraud and irresponsibility on the part of U.S. companies.
Justified or not, this view will continue to depress U.S. markets and the dollar by sending investors into safe havens like gold and government bonds. Meanwhile, continuing stock market declines could poke a hole in U.S. consumer confidence, as the heavily invested middle class begin to feel more vulnerable and less wealthy in general.
That combination of a weak dollar and depressed U.S. markets will be bad news for just about everyone.
Topping the list is Japan, which is counting on rising exports to keep its economy from sinking once again into recession. Export growth depends on two factors -- a weak yen to make Japanese products more price-competitive globally, and strong global consumption -- especially in the United States, the biggest market for Japanese exports. But after peaking at nearly 135 yen in February, the dollar dropped back below 119 yen on June 26 for the first time in eight months. Three separate overnight interventions by the Bank of Japan totaling $5 billion failed to keep the yen over 120, CBS Market Watch reported.
Japan has intervened directly in the currency market six times in the last five weeks, to little avail. Nevertheless, Tokyo has little choice but to continue selling yen on the open market if it hopes to avoid further strengthening against the dollar and a drop-off in exports. The alternative: recession.
More interventions will put pressure on other Southeast Asian countries, whose exports could become more expensive in relation to Japan's. This would renew tensions between Japan and its neighbors and raise the prospect of competitive devaluations. China, with its dollar-pegged currency, could see a short-term benefit as its exports become cheaper relative to its neighbors. But this too will fuel arguments over relative currency strengths and the need to devalue, clouding Asia's economic picture.
Europe too is at risk from a falling dollar. Though euro-dollar parity will be lauded in Brussels as a vindication of the common currency, the reality is that the euro's recent strength has more do to with questions about the U.S. economy and markets than it does with confidence in the eurozone. Economically, Europe is not yet out of the woods. If U.S. consumers - who soak up one-quarter of EU exports - cut their spending in the face of climbing import prices, Europe, like Japan, could sink into the doldrums. Although dollar-euro parity does not pose a threat, a continued climb by the euro of 10 percent or more would be counterproductive.
The biggest concern, although not terribly likely at this moment, is that a sharply falling dollar could spark a sustained sell-off in the U.S. stock market -- putting the brakes on consumer and corporate spending -- and that higher import prices could stoke U.S. inflation and push up interest rates.
Ultimately, the United States remains the main driver of any global economic recovery, and a healthy dollar is important to keep the U.S. economy rolling. If already skittish investors decide the U.S. markets are no longer a sound bet, demand for the dollar as well as its value will fall. If it falls too far or too steeply, the dollar could take both the Asian and European economies down with it. |
