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Strategies & Market Trends : Currencies and the Global Capital Markets

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To: putcallyall who wrote (3528)	4/7/2005 2:12:11 PM
From: Robert Douglas	Read Replies (1) of 3536

Currency trading--any thoughts on the dollar vs. other major currencies? The much ballyhooed decline in the dollar has done little to correct the trade imbalances. The reason for this is that the dollar began its decline from such a high level that it's only NOW getting to the point where non-dollar based companies are having to raise their prices meaningfully. This price change must occur before buying habits change. As long as dollars from trade flow abroad there will be pressure on the dollar. Presently there is a countering flow of dollars returning to the U.S. as domestic companies repatriate profits (due to the tax holiday) and an interest rate differential that is attracting foreign investment. This cannot continue forever. Too much demand is being siphoned away and either the dollar will fall on its own weight or the economy will buckle, interest rates fall again and with it the counterbalancing investment flows. Personally, I think the biggest move in the dollar will come vs. the Asian currencies with the yen bearing the biggest burden. There is absolutely no justification for running a large trade deficit with a developed economy like Japan's - especially since Japan runs a trade surplus with another of our big trading partners - China. What has to happen, is that the yen rises enough that trade between the 3 countries flows more in the direction of the United States. More of the dollars we use to buy Chinese consumer goods will return as Chinese buyers buy U.S. capital goods rather than Japanese made capital goods. This will be accomplished via a rise in the yen of at least 25%, IMO. I think it's shameful that he Japanese Ministry of Finance has been able to depress the yen for so long with massive intervention. But this has only postponed the day of reckoning.

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