There is a fundamental dollar problem, the huge twin deficits.
US is exporting most goods from Asia and even Europe. $2 billion
a day in foreign inflows are needed just to keep the dollar
steady. Needless to say, their selling would ruin the currency.
The only thing keeping the dollar alive was the carry
trade, thanks to the rates higher than in Europe and in Japan.
The rates are no longer rising, and the European and Japanese
investors are not very eager to buy US corporate and mortgage
paper (do you blame them?). Since that, not the Fed, was the
biggest source of the credit
market funding, we just might have a credit crunch and the
dollar slide, also known as the currency crisis. -g- I just
wonder how much longer can the dollar float above strong 80
support. A break will likely kill it, and so will any weakness
of the US economy. The carry trade must be pretty lopsided
toward the dollar, supporting it all these years. Of course,
we'll never know until a major bank failure, cause most of
these positions are OTC, off balance sheets, hidden trades.
BIS says currency and rates swaps have a notional value
of 400 Trillion dollars. That makes the Fed pretty small and
irrelevant. They need lots of help from other CBs. |
