To: Haim R. Branisteanu who wrote (145050 ) 1/21/2002 9:10:15 PM From: John Madarasz Read Replies (2) | Respond to I get that failure occasionally as well...pimco.com That the strength of the dollar depends, in part, on our status as the world’s military superpower and global policeman is just one additional factor to consider going forward. Our success or failure in the War Against Terror will be watched by foreign investors to measure whether the U.S. is truly a safe haven or whether it is as vulnerable as the rest of the world in future years. But the War on Terror notwithstanding, it seems likely to me that the dollar is in the process of peaking and that it can no longer be counted on to positively influence inflation downward, nor to lure foreign investors to our shores in search of a can’t miss currency and securities market double play. If so, there are numerous investment strategies that take their cue from such a reversal. The forever canonized long Euro versus short dollar trade that PIMCO, as well as countless other financial institutions, have deployed for what seems like centuries is one of them. With European short rates well above those of the U.S., at least true believers are being paid to wait these days. Secondly, though, if the dollar does lose its luster, look for the U.S. bond market yield curve to be affected. With the short end of the curve being held down by the Fed for much of 2002, foreign investor aversion to financing the current account deficit will most likely be felt via a buyers’ strike or even sale of the longer end of the curve. Repatriation, whether it’s simply to avoid a potentially weak dollar versus the Euro or, perhaps, to shore up a bankrupt economy as in Japan, is an increasing possibility and could most easily affect 10-30 year maturities as opposed to 1-3 year paper. PIMCO hopes to be ahead of the pack if, in fact, events begin to unfold in this direction. And Mr. Lansner, if you will permit, a weaker dollar is certainly no friend of stock market investors either.
