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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: russwinter who wrote (1272)	10/6/2003 1:16:59 PM
From: ild	Read Replies (1) \| Respond to of 110194

Global: The Global Labor Arbitrage Stephen Roach (New York) morganstanley.com

To: russwinter who wrote (1272)	10/6/2003 2:49:57 PM
From: ild	Respond to of 110194

Why Is the Dollar So Resilient? Substantial trade and fiscal deficits, an overvalued stock market, and too much debt are some of the bearish factors for the dollar. If it were another country, the currency would have collapsed, in my view. Why is the dollar so resilient despite the marketfs relentlessly bearish tone? The broad dollar index is at where it was in 1997. Of course, one could point to central bank buying as the reason. But there are trillions of dollars of foreign private capital in the US. If foreigners were to sell simultaneously, no force could stop a dollar collapse. In my view, there are three reasons why the dollar is so resilient. First, other countries often have bigger problems. Europe and Japan face aging populations and rigid factor markets. This is why the Europeans and Japanese are far more pessimistic than the Americans. Their pessimism causes the huge US trade deficit that is the main factor for the dollar bear case. Isnft it strange that pessimists should have strong currencies? Yet, this is how markets work in the short term. In the long run, it would be bizarre to bet on the currencies of pessimists. This is why long-term capital is not responding to dollar weakness in the way that short-term capital is. Second, things are still cheaper in the US, even though its stocks are overvalued. Despite the recent sharp rise, US housing prices are much lower relative to per capita income than elsewhere. In terms of absolute value, US properties are much cheaper than in Asia, excluding some pockets inflated by the equity bubble. Property value is the most important determinant for currency value in the long term, in my view. It is the biggest cost component in an economy. Third, the renminbifs peg to the dollar will not change for the foreseeable future. Cheap Chinese imports boost US competitiveness, and may even allow the US to reduce its trade deficit by substituting Chinese products for expensive European and Japanese ones. Even though US policymakers appear to be obsessed with Chinafs impact on US manufacturing employment, China is a very positive factor for US competitiveness, in my view. Hence, if the peg stays, the dollar value would be resilient. Of course, the financial markets are betting that China will scrap the peg on international pressure. This, I feel, is very unlikely „Ÿ Chinese leaders traditionally put domestic stability ahead of foreign concerns. Thus, the probability of a significant renminbi adjustment appears zero. Asia Pacific: The Party Barely Survives the Weak Dollar Andy Xie (Hong Kong) morganstanley.com