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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: mishedlo who wrote (6223)5/12/2004 2:13:24 PM
From: CalculatedRisk  Read Replies (1) of 116555
 
Mish, we’ve discussed this before but it is worth revisiting: given the trade imbalance, and under normal macroeconomic scenarios, the dollar should fall significantly against the Euro and other currencies. One would expect to see $1.30 to $1.40 per Euro or higher, and maybe we will over the next few months.

The alternative would be a US interest rate a couple of points higher than our trading partners. A high interest rate wouldn’t lower the trade deficit directly, but would attract foreign investment to keep the dollar stronger than usually expected given the trade imbalance. Of course, high interest rates would put the US economy into recession (if not depression) and lower US demand, and thereby lower the trade deficit.

So far, neither of these scenarios (weak dollar or high interest rates) is occurring. We can look at the details of the trade deficit to see why: as much as 75% of the deficit would not be impacted by a weaker dollar! Of the $46B deficit, $13.7B is due to oil imports. With more global demand (especially China) a weaker dollar has not reduced the cost of oil. In fact OPEC and others have wised up to that game, and appear to mark to the Euro when the dollar is falling.

Another $19.5B of the deficit is with various Asian countries, primarily China ($10.4B) and Japan ($6.7B). China is fixed to the dollar, so a weaker dollar does not help. Japan was defending the dollar although I haven’t seen anything on this lately.

Just Oil and China account for half the deficit and this will not be impacted by a weaker dollar, only a weaker economy. I think this is another argument (along with the incipient housing slowdown) that a US recession is coming.

Best to all.
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