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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: Seeker of Truth who wrote (50038)	5/15/2004 3:24:08 PM
From: EL KABONG!!!	Read Replies (1) \| Respond to of 74559

Hi Malcolm, All the support given the dollar by China and Japan did not prevent it from sagging for a year and a half. Now suddenly there is a reversal so I reason that there must be new money flowing toward the US dollar. Who it is and what is their motive, is mysterious to me. One can obtain a much higher real interest rate elsewhere. Well, technically yes, I suppose there is "new money" flowing into the US$, but it's really nothing more than currency traders changing their US$ positions from net short to net long (to capture any expected near term US$ price movements to the upside). You are correct in presuming that regarding the US$, nothing much has changed recently. But the perception has changed, and these days, perception rules the roost. To start, currency speculators (and just about everyone else) expects inflation to begin rearing its head in the US economy. Also expected is a slight to moderate rise in the Fed Funds rate (perhaps as many as 75 basis points, raised 25 bps at a time over 3 successive Fed meetings). A higher Fed Funds rates implies higher future interest rates throughout the US economy, and that in turn, combined with anticipated rising inflation is almost certain to kill any lingering fears regarding deflation and/or stagflation. As the US economy goes, so goes the global economies, or at least that is the perception. Higher interest rates in the US economy creates a stronger US$, or so the theory goes... Also weighing on the minds of currency speculators is whatever actions the Chinese government may take to cool down its domestic economy, which is currently perceived to be "too hot". A cooling Chinese economy translates into a rising US$, again based on perception. Japanese exports to China (and directly/indirectly) to the USA are dependent upon flourishing economies in North America and China, so any slowdown in either location is bad news for Japanese exports. With both China and the US (via the Fed's anticipated rate increases) taking actions to slow down their domestic economies, Japan's outlook becomes a little less bright, and the prospects of the US$ rise against the Japanese yen. It's all about speculation and perception. Nothing really changes. KJC