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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: CalculatedRisk who wrote (6225)	5/12/2004 2:37:52 PM
From: mishedlo	Respond to of 116555

given the trade imbalance, and under normal macroeconomic scenarios, the dollar should fall significantly against the Euro and other currencies. One would expect to see $1.30 to $1.40 per Euro or higher, and maybe we will over the next few months. The alternative would be a US interest rate a couple of points higher than our trading partners. A high interest rate wouldn’t lower the trade deficit directly, but would attract foreign investment to keep the dollar stronger than usually expected given the trade imbalance. Of course, high interest rates would put the US economy into recession (if not depression) and lower US demand, and thereby lower the trade deficit. Two points higher than our partners is not going to happen excluding Japan possibly. Given that, the US$ should be falling. Europe is actually 1 point higher than us right now. We would have to hike 3 points for what you suggested to happen. Bear in mind, Europe has its own problems. If they act to reduce their deficits as per charter it would be instant recession for them IMO. Your logic about how much of our trade defict is not curable makes sense. Even IF China were to repeg or float will it do much good? They want to slow down their economy so will they be buying more of our cars and CAT tractors or whatever? We going to sell them even more soybeans and cattle? What does that solve? A weaker economy just might have a big impact. We stop buying China crap which forces China to slow. The trade deficit does not go away but gets smaller. The US$ going up is sure discounting lots of rate hikes and possibly an expansion that continues here but dies in Europe. Does not seem likely to me. M