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Strategies & Market Trends : Currencies and the Global Capital Markets -- Ignore unavailable to you. Want to Upgrade?

To: yard_man who wrote (13)	5/1/1998 4:14:00 PM
From: Henry Volquardsen	Read Replies (2) \| Respond to of 3536

Barry, I wouldn't necessarily preclude a good buy in some of the Asian equity markets. I don't expect a dramatic dollar rise in the near term so as long as you have a target company that can take advantage of the weak currency to turn in growth in excess of the currency depreciation, you can still make money. So if you have the right equity... The trade deficit would have to get pretty bad to seriously undermine the dollar imho. What most people don't realize is that what most people refer to as the trade deficit is actually the merchandise trade deficit. On services the US runs a sizeable surplus and the liberalization of global capital controls will reenforce this. Also capital flows are at least as important as trade flows and the US remains an attractive investment environment. Remember the trade balance is only a problem for the currency if foreigners don't want to hold the currency as an asset. So you have to look at other measures in addition to trade and capital flows to see if the currency will weaken. It is not just supply and demand. I think what you need to analyze is whether the value of the currency is being maintained i.e. is the government debasing the currency. For this you need to look at inflation rates, real rates of return, budgetary balance. total debt to GDP etc. If a country has a trade deficit yet the government is protecting its value by not debasing it foreigners, on balance, will be willing to hold it as an asset. However if a country has a trade surplus yet is debasing the currency through various means domestic investors may not be willing to hold it. That explanation may have rambled a bit so feel free to ask some questions and I'll try and clarify my thinking on this. BTW we are going to see a growing trade deficit with Asia in the near term but that is only part of the equation. Europe will be a real wild card. If after the creation of the Euro we see a strengthening of the Euro (likely) and a growth spurt then Europe will suck in imports from the US so that will help our balance. Henry