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

To: GUSTAVE JAEGER who wrote (538)	9/1/1998 12:03:00 PM
From: Robert Douglas	Respond to of 3536

It doesn't take a genius to list all the problems in the world. I'm inferring then that you are predicting that these problems will have a "flight to safety" effect on the dollar. This may well turn out to be true, but it may equally turn out that this will be an insignificant factor in determining the course of the dollar. You mention the problems that Germany will have with Russia and equate them to the ones they have had with unification. If you follow currencies, you will remember that the last bull market in the DM was following unification with East Germany as the resulting inflation led to a period of high interest rates which attracted foreign investment. Also remember that there is an old saw in the investment community that applies here. It goes something like this. In bear markets investors sell their good investments to protect their bad ones. This might be happening now as foreign (Outside the US) investors sell off their dollar denominated assets (their good ones) to protect the ones denominated in local currencies (the bad) since they can't bear to part with them at the distressed prices. Flight-to-safety issues are never cut-and-dried and sometimes the results are contrary to what logic might tell you. On the other hand the present current account imbalance is easy to quantify. Each year the amount of investment that flows into the US must be large enough to balance the flows out of the US which includes the trade deficit plus the interest and dividends from the accumulated deficit from prior years. In a sense the US is at the wrong end of the "compounding stick", therefore the amount of inflows must increase each year at an ever faster rate of growth as long as the trade deficit expands. All that has to happen is for the rate of growth of these inflows to slow and it spells trouble for the dollar. Whether this is occurring now or not, I don't know for sure. I am sure that it will happen one day. -Robert