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Strategies & Market Trends : Currencies and the Global Capital Markets

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To: Robert Douglas who wrote (560)	9/3/1998 1:46:00 PM
From: Henry Volquardsen	Read Replies (2) of 3536

The trade deficit does require us to attract ever more investors. This is a technical point so I am not trying to be dense, just making an obscure BoP point. The investor that finances the trade deficit is automatic. When a foreigner sells us goods he effectively accepts the dollar as payment and he becomes the investor. If we are not selling enough goods to redeem all the offshore dollars it is not really our problem, it is theirs. It is only when they refuse to sell us any more goods that it becomes our problem. So in effect the trade deficit is self financing, as the foreigner accepts payment he becomes the investor. If he refuses to accept dollars, or someone in the market refuses to accept the dollars for the currencies want, then we can't buy the goods and the trade deficit disappears. The currency market comes in play when the existing pool of foreign investors in the dollar express their desire to continue being investors. Since the existing pool of external dollars is much larger than marginal additions generated by the trade deficit the dollar's movements will be effected by sentiment and can swing wildly out of line with what the trade account suggests. But there is no need to attract investors to finance the deficit. The simple mechanics of the balance of payments requires them to be there in the first place. If they weren't we wouldn't be able to purchase goods overseas in the first place. Also one other point. You reference a fellow with a job title of "manage of client advisory services". I'm sure he is a very bright fellow but I've had jobs such as that early in my career. I know exactly what the job is and the gut is essentialy a salesman. His job is to try and make up a story about the market and convince clients to do a trade. These guys are notoriously short term oriented. Think of your stock broker. I would as soon take a bank's client advisory services opinion about foreign exchange as I would take a stock broker's advice about equities. Henry

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