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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: Tommaso who wrote (423)	1/4/1998 12:59:00 PM
From: Rational	Read Replies (2) \| Respond to of 9980

Tommaso: I feel the US$ would have risen much higher had the money supply not increased as fast as it did. The US policy makers are very concerned about the ballooning trade deficit; which is not caused by US$ appreciation, but by the economic fundamentals (lower costs of production elsewhere). US$ is appreciating because most of the proceeds from US imports stay in the US (stocks and bonds). US is considered to be a "safe haven" for investment. [Of course some of these proceeds are US corporate profits from exports of operations overseas.] The US has been trying to change these fundamentals by trying to soften the US$ through money supply growth. This money supply growth appears amazingly similar to what SE Asian countries did when foreign capital was flowing at a mind-boggling rate, increasing the demand for local currencies. The SE Asian problem stems from a rise in the trade deficit (and current account deficit) funded by external borrowing and an increased money supply growth to meet the demand for the local currency. In the US too, the trade deficit is funded by external borrowing (e.g., from Japanese and others who park their export dollars in US Treasuries and Stocks.) Logically, US$ will have to fall, eventually; I am not sure when that will happen and whether US$ will continue to rise before falling. Fed may further increase the money supply growth and/or US capital will find Asian stocks and bonds as attractive investments. This will happen gradually and US$ may keep rising before it begins to fall. Sankar