BigBull,
Dames and Dollars. You covered the dames part pretty good.
Now how about the Dollar? I'm interested in views on what happens to the oil price when the dollar drops, sometime:
Dollar in danger
David Hale, FT, September 5 2000
The writer is chief global economist at Zurich Financial Services Group
The US dollar has been so resilient for so long that most commentators cannot conceive of circumstances in which it would experience a sharp
correction. Foreign demand for US assets remains so strong that there is little reason for investors to lose faith in the short term. But once the US
presidential election is over confidence could be tested by a variety of policy surprises...............
The US will soon have a deficit on its international investment account of 20 per cent of GDP, compared with a previous peak of 24 per cent in 1894.
The expansion of the current account deficit to 6-7 per cent of GDP when there is already a deficit on investment income could at some point frighten
the foreign exchange market and set the stage for a dollar correction.
From The euro fights back by Barry Riley, FT, June 9, 2000
There are worriers around. This week, the Bank for International Settlements, the central bankers' central bank, emerged from its usual obscurity in
Basle to publish its annual report. "The global economy now stands on the brink," it announced. "But," it added unhelpfully, "the brink of what?" The
danger of a nasty global rebalancing, focused on a tumble by the US dollar, seems to underlie its anxieties.
Central bankers and journalists are habitual gloomsters. People have to rely on stockbrokers and the promoters of mutual funds to spread sunshine.
Pessimism has begun to lift: as the leading economies slow down ahead of a soft landing, the threat of sharply higher interest rates is fading and we
should be able to concentrate on the wonderful story of technology-led change and inflation-free growth.
Think of the US investors who have made so much money by buying the dips over the past five years.
But central bankers and journalists don't easily believe in miracles. Unconstrained optimism has regularly proved costly in the past. The Japanese
miracle, which at one time terrified corporate America, fizzled out in 1989. The Asian miracle had a good run but eventually crashed in 1997. As for the
UK, the Lawson miracle encapsulated the usual features of booming growth, rocketing asset prices and a yawning but ( for a while, at least )
easily-financed trade gap. Yet, it hit the buffers in 1988.
It is the huge imbalances that catch the eye at present, such as a US current account deficit heading towards $400bn a year.
However, the investment flows may be just as important. Indeed, there is something of a chicken-and-egg problem here. Do the investment flows
happen because countries find they are piling up excess dollars through trade? Or do the trade gaps widen because institutions or companies around the
world are so keen to invest in the US that they are driving the dollar to uncompetitive levels?
Either version of events suggests unsustainability, though the second might well prove longer-lasting.
In an old-fashioned, divided world economy, the rebalancing pressures would be high. In those circumstances the US, Japan and the euro-zone should
be more or less financially self-contained. But, in a globalised economy, they need not be.
If Japan wants to sustain a high personal savings rate but Americans spend their way towards a negative one, that will be possible for an extended
period. However, the Japanese must be ready to invest overseas and the Americans must accept the responsibilities and drawbacks of being the
world's biggest debtors; the costs are much greater than just those of reassuring foreign hoarders of greenbacks that their wealth is not threatened by
the redesign of the notes, a problem the US is now having
to address.
As for the euro-zone, the ECB seems determined to consolidate the recovery by the euro against the dollar of 7 per cent since the low point on May
17. It has been the sharpest rally during the whole period of downwards drift ( aggregating 25 per cent at its worst ) since the new currency was born
17 months ago.
The ECB might have realised that its low interest rate strategy could have encouraged so-called "euro-carry" trades ( the borrowing of euro to be
switched into higher-yielding dollar assets ) . This is a rather pale version of the Japanese yen-carry trade which was very substantial during the late
1990s, driven by much wider interest rate differences. But that game ended last year when several New York hedge funds lost money.
Carry trade distortions can generate persistent exchange rate trends, but can also cause sudden sharp reversals when the risks of the currency
mismatching become painfully obvious and positions are unwound abruptly.
As the BIS describes in its annual report, much of the euro's slide can be linked to the rapid development last year of euro-denominated financing,
encouraged by low interest rates, and the widening perception by borrowers that the euro would prove to be a persistently weak currency. The ECB
has repeatedly refused to evade this psychological trap by directly intervening to support the euro but, instead, it has now moved quite aggressively on
interest rates.
The potential fundamental problems of Japan are considerably greater. Japanese citizens are big savers, which is unfortunate in a country short of
demand; but, so long as they are content to stash the money away in ( almost ) zero interest rate accounts, the system will remain stable. The trouble is,
the financial ratios will grow ever more frightening.
Rather similarly, the US financial system will remain stable as long as foreigners are happy to channel $25bn a month into dollar securities or corporate
investments.
But it is easy to understand why all this is viewed nervously in Basle.
True, the brink is defined by my dictionary as the edge of a steep slope, with some ambiguity about whether the gradient is upwards or downwards.
Perhaps the rest of the world is about to share in the economic acceleration already enjoyed by the US.
Normally, though, brinkmanship involves tactics leading to the edge of disaster.
On a trade-weighted basis, the dollar has suddenly dipped by 5 per cent, eroding some of the protection that currency strength has given the US against imported inflation.
Higher interest rates are required to hold back demand and inflation - but lower rates are needed to support the US securities markets and keep foreign
investors happy.
internetional.se
Best Regards,
Roebear |
