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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: bruwin who wrote (21658)	7/14/2005 10:47:12 AM
From: bruwin	Respond to of 78748

The US Dollar vs. The Rest ... I thought I'd put the following forward for those who are interested in the Currency Market and the fortunes of the US Dollar. This is not "my own work", but comes from an Investment Letter I receive. "Three of the major currencies, viz. Euro, UK Pound and Yen, have been losing strength relative to the Dollar at compound annual rates of 20.8%, 11% and 13.9% respectively. This is due, to a large extent, because of stagnation in many of the world economies, with the exception of the USA in recent times. GDP in the USA has been rising at an annual rate of 3.5% at a time when Europe and Japan are limping along at about 1%. The US, faced with a deepening recession in 2000, made worse by 9/11, primed its economic pumps by cutting to the bone, both Government taxes and its domestic interest rates. The economy responded as expected. Having decided that the recovery was entrenched, the Federal Reserve began raising interest rates again. Across the Atlantic, however, where Britain and Europe are experiencing a steadily deepening recession, interest rate cuts are only now coming into play. As a result, European investors, seeking a better return for their capital, have been attracted by the US yields. That is why money is flowing out of the UK, Germany, France etc.., and heading for the US. This is strengthening the Dollar and helping to fund a record US trade deficit. The question is, "When will those investment flows end ?". The logical answer seems to be, "When US interest rates are no longer attractive to foreign investors." And judging by relative strengths between the US Dollar and other major currencies, it appears that those flows may have begun to dry up as the graphs are now moving sideways. There are those who are of the opinion that this will continue for the balance of 2005, and who even go so far as to speculate that there could be a "reverse flow" of Dollars to the UK and Japan towards the end of 2005."