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Politics : Foreign Affairs Discussion Group -- Ignore unavailable to you. Want to Upgrade?

To: GST who wrote (122350)	12/28/2003 7:46:51 PM
From: Hawkmoon	Respond to of 281500

The dollar has lost nearly a third of its value against the Euro in the last year or so -- this is a disaster for European investor in US financial securities. Sure it is.. as well as for the Japanese. But they continue to buy US denominated assets, now don't they? Otherwise, US interest rates would be far higher, as would their own currencies.. Because anyone who knows even a little bit about the macro-economics of the trade deficit knows that when a country sells products to the US, they have a choice of converting the USD they receive back into their own currency (which strengthens their own currency while weakening the dollar), or plowing it back into US assets in order to maintain their favorable currency ratio (keeping the dollar strong). But they can only buy so many US treasuries, because he pushing down interest rates, creating competition from US investors ALSO seeking safe haven from a collapsing equities market. Thus, the soaring bond market of the past couple of years... So over the past couple of years they faced little upside in the bond markets, as rates bottomed and the US gov't expanded the deficit to pay for 9/11, the war, and probably the prescription drug bill and are opting not to buy as many US treasuries, preferring instead to repatriate their profits back into the Euro.. But while that may be good for the appreciation of their currency, it's a tremendous burden on their economy if they continue to permit that trend to continue without committing to some basic restructuring of their tax and entitlement systems.. And I don't think they'll have the political will to make such fundamental changes in the face of increasing unemployment and the same competition from Asian manufacturers faced by the US. The bottom line is that the dollar was overvalued to the point that it was a detriment to US industry. Recent profit gains in US corporations, IMO, can be directly attributed to decreasing cost competition from Europe and Japan. And even if foreigners don't choose to continue buying US treasuries, I believe there exists a tremendous amount of US cash (some $5 trillion) sitting around waiting to buy into European selling as interest rates increase to an attractive risk/reward level in the bond markets. Either way, the potential for markets to extend the run on the dollar is high. Just as is the potential for the ECB and Bank of Japan to intervene, buying dollars to stem the advance of their own currencies. EU members have already warned that they may do just that. Our children inherit the debt. Great economic policy Hmmm... I thought all of you liberals were Keynesians "pump primers".. The increased deficit spending here has primarily been on social programs, homeland security (which you all have said is lacking), and defense spending.. But one other thing that should not be forgotten is that in real dollar terms, the price of oil (denominated in USD) is lower now than it was a year ago, despite a 15+% decline in the dollar over the same period of time: futures.tradingcharts.com stockcharts.com Furthermore, the USD has been even lower as recently as 1993, where it hit a bottom of 78 (we're at 87.50 right now), so it has 10 cents more to go before risking a complete breakdown. stockcharts.com So once again, you produce the heat, while I produce the "light" of factual information.. Btw, I would suggest you think about selling Euros over coming weeks and buying dollars.. It should make for a good currency arbitrage play. The USD should rebound to at least 93 to 95 within a couple of months. Hawk