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2004-11-18 Home Front: Economy

U.S. dollar plunges against Asian currencies

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Posted by Mark Espinola 2004-11-18 5:56:06 AM|| || Front Page|| [5 views since 2007-05-07] Top

#1 As I have said before, there is one humdinger of a financial crisis coming.

Posted by phil_b 2004-11-18 7:30:18 AM|| 2004-11-18 7:30:18 AM|| Front Page Top

#2 Like to give us the top 4 or 5 fallout items from said crisis, phil? I don't expect you to write a book, but I would be fascinated by some 90K ft view semi-predictions... If you have the time & inclination, that is. ;-)

Posted by .com 2004-11-18 7:33:10 AM|| 2004-11-18 7:33:10 AM|| Front Page Top

#3 Fallout item number one is that Germany (and any other export-oriented Euroland economy) is screwed. Fallout item number two is that if Russia and other crucial oil producers decide to price their oil in euros, then we're screwed-- so long as we remain addicted to the crack that is oil. I would expect us to finally get serious about shifting massively to nuclear fuel in that case.

Posted by lex 2004-11-18 8:13:37 AM|| 2004-11-18 8:13:37 AM|| Front Page Top

#4 This is a currency cycle. A devalued U.S. dollar is great for our exports, because American made products become cheaper for foreign importers.

The downside is, people working for American companies overseas, earning dollars have been hit hard by the rise in the euro. It also raises costs for Americans on vacation in Europe and burdens businesses that rely on tourism, such as hotels and restaurants.

Across the Pond: The Euro, launched in 1999, slumped to less than a dollar for about 2 1/2 years between 2000 and mid-2002. It's now 57 percent above its all-time low against the dollar of 82 cents from October 2000.

The Germans and French were the big promoters of a Euro Superstate currency and now French Finance Minister Nicholas Sarkozy is crying about the Euro's dramatic climb. Get this guy, "The U.S. must cut its budget deficit: This is an unanimous message from Europe and the International Monetary Fund which we're sending to our American friends,"

I have two words for this weasel like frog, 'Drop & Dead'! What happened, all of Saddam's UN Oil-for-Profits dough dry up Mr. Frenchie? It would be great just to teach the E.U. Superstate a hard currency lesson, to drive the Euro up to 140+ against the U.S. Dollar and then reverse the cycle.

Are the French & Germans still in love with their soaring Euro?

Posted by Mark Espinola 2004-11-18 8:45:49 AM|| 2004-11-18 8:45:49 AM|| Front Page Top

#5 Crisis or not it's reality coming home to roost.
No one can dictate a free market for long. And when its tried to only exacerbates the inevitable correction.

Posted by domingo 2004-11-18 9:47:19 AM|| 2004-11-18 9:47:19 AM|| Front Page Top

#6 It means that items like electronics and automobiles are going to cost more if they are produced or assembled in Asia. Those companies that established plants in the US will be able to keep their prices stable and be competitive. Its a wake up call for those businesses that have placed nearly all their product creation in China, etc. They will see the profit margins decrease unless they shift production to other locations. Technically, it should make American materials cheaper, like agro products, but since we tolerate trade barriers against our materials [the endless negotiations without resolution], we are unlikely to see any real increase in sells.

Posted by Don 2004-11-18 10:36:10 AM|| 2004-11-18 10:36:10 AM|| Front Page Top

#7 Problems are coming home to roost, yes Phil B I think you are right.

This has been brewing since the free money party of the 90s pumped too much liquidity into the system. Greenspan can't take the punchbowl away and now it's paying time.

They want to inflate their way out of the deficit.

Problem is: China pegs the Yuan to to Dollar, so falling dollar means even cheaper products from China.

another problem is: Japan cannot prop up the dollar and thus bond market for too much longer.

IF the dollar values too much more people will take their money out of US Bonds.... leading to interest rate rises.

Because the US boom is running on re-fi cash, interest rate rises will be a fatal blow to domestic demand.

Fleckenstein has written loads of good stuff on this: he's been calling it since he was one of the few to call the tech wreck (before it happened).

Posted by Anon1 2004-11-18 12:01:37 PM|| 2004-11-18 12:01:37 PM|| Front Page Top

#8 See Bill Gross of PIMCO as well. All depends on the Asian central bankers' willingness to stick with Treasuries.

Posted by lex 2004-11-18 1:47:53 PM|| 2004-11-18 1:47:53 PM|| Front Page Top

#9 Asian countries will act to prop up the dollar. They don't have a choice. Chinese sales of the dollar to buy Asian currencies is what's driving the dollar down. The thinking is that what they're doing is to front-run their repegging of the yuan-dollar exchange rate, which is rumored to be set at a 10% revaluation of the yuan (i.e. the yuan buys 10% more dollars). Since the dollar is about to become less valuable with respect to the yuan, the revaluation makes Chinese labor and materials costs less competititive. As a result they are trying to ding their biggest competitors, the other Asian countries, by making their currencies stronger with respect to the dollar as well. And the Asian central banks will respond to keep their currencies competitive by buying dollars with their own currencies - but only after the Chinese have stopped selling their dollar holdings. They are waiting for the dollar to hit its lows before responding.

Posted by Zhang Fei 2004-11-18 2:03:32 PM|| [http://timurileng.blogspot.com] 2004-11-18 2:03:32 PM|| Front Page Top

#10 If ZF's analysis is right, an interesting implication is that the euro is simply a spectator here. Nothing that the EU central bankers, or the EU economies' central banks, do will have much effect on the dollar's trajectory.

An additional reason may be that, even with very strong strong incentives to world investors to buy euro-denominated bonds, they still don't find Europe's prospects attractive. Or perhaps because the EU budget data and the EU central banks have zero credibility with investors.

Posted by lex 2004-11-18 2:15:48 PM|| 2004-11-18 2:15:48 PM|| Front Page Top

#11 Well that pretty much makes my plans building a new Computer in the spring a fairy tale for the present.

How will this effect oil prices long term again?

Posted by Sock Puppet of Doom 2004-11-18 2:30:44 PM|| [http://www.slhess.com] 2004-11-18 2:30:44 PM|| Front Page Top

#12 Firstly, the US trade deficit and the government deficit are not the same thing and while they are related, fixing one doesn't require fixing the other. (Australia also has a big trade deficit while the government runs big surpluses) The trade deficit is the problem that must eventually rectify itself and that must be by the USD falling much further (markets always overshoot).

The main impact is a recession in East Asia and Europe. Probably a big one - think back to 1972. US imports get a lot more expensive, so manufacturing gets repatriated back to teh USA and dollar zone (primarily Latin America). You would expect oil to get a lot more expensive in USD but a global recession is more likely to send it into free fall (10 USD a barrel?). Interest rates will go up as will inflation, and we will see a fall in asset prices (particularly houses).

Perhaps the consequence of most concern here is the fighting the WoT gets a lot more expensive (in USD) and the USA pulls back into a more defensive posture and the Anglosphere is drawn closer together (the Australian dollar, canadian dollar and UK pound will tend to follow the USD down.)

Politically who knows? I doubt there will be serious instability in China. Instability in the Arab world is much more likely. The Norks starve in the dark and cry 'uncle'.

Posted by phil_b 2004-11-18 4:31:32 PM|| 2004-11-18 4:31:32 PM|| Front Page Top

#13 The likelyhood that the Euro will be used for oil purchases is remote. The European economy is tightly regulated and they have severe growing social problems, not exactly a good investment.

Posted by badanov 2004-11-18 4:43:54 PM|| [http://www.rkka.org] 2004-11-18 4:43:54 PM|| Front Page Top

#14 Ok, had to comment here. The trade deficit affects the current account deficit, not the federal deficit. The federal deficit is a function of how much in taxes we feel like paying.

The dollar has ben overvalued for decades because Japan (and then China joined them recently) made a deal with the devil to keep the dollar overvalued in order to increase their exports. But, it's not as simple as that because the cost to them is that they've been forced to buy ridiculously low interest rate treasuries from us (thus funding our growth and standard of living) to keep the dollar high. The net affect is that we get a trade deficit but we get higher standards of living, huge amounts of capital for cheap to invest in growth and money to do foreign direct investment abroad (which has a much higher return than our treasuries other countries are buying and in fact we have a net profit of about 10 or 20 billion dollars every year from our deficits). Japan and China have played a VERY stupid game and it's about to come home to roost. The can't afford to continue propping up the dollar (both countries are in debt up to their eyebrows from financing our growth at below fair market rates) and they are both saying they can't do it anymore. That's why the dollar is dropping... it's dropping back to it's fair market value after decades of being artificially pumped up.

The fall of the dollar will increase our interest rates, increase our exports, decrease our imports. The biggest loser is Europe, second is asia. The biggest winner is the US.

Anon1, you need to understand the whole process... china doesn't simply decide to say "Hey we set our currency to the dollar". That doesn't mean anything. To set their currency to the dollar they have to be willing to trade their currency for dollars at their set ratio (~8:1). Since people don't believe this ratio is correct, they beliece the yuan is worth more... the chinese gov't has to be willing to convert yuan to dollars at this ratio to maintain it. And they have been... that's why they're buying treasuries like mad. They day they stop is the day the yuan is no longer pegged to the dollar. Because it's bankrupting them they are trying to switch off the dollar peg (but this is a big problem because there is now such a huge difference in value of a yuan and dollar and the shock of adjustment would send the chinese economy into depression) by switching to a basket of asian currency peg. They can't go free floating because their currency would skyrocket in value over night.

Posted by Damn_Proud_American 2004-11-18 5:10:23 PM|| [http://brighterfuture.blogspot.com] 2004-11-18 5:10:23 PM|| Front Page Top

#15 One other thing, the world economy was more globalized in 1913 than it was in 2003. After 1913 globalization went into reverse for 50 years. There is nothing inevitable about globalization. I predict the world in 15 years time will be less globalized than it is today.

Posted by phil_b 2004-11-18 5:12:13 PM|| 2004-11-18 5:12:13 PM|| Front Page Top

#16 "After 1913 globalization went into reverse for 50 years. There is nothing inevitable about globalization. I predict the world in 15 years time will be less globalized than it is today."

Whoa, that's a pretty out there claim. You gotta back something like that up with facts when you say it...

Posted by Damn_Proud_American 2004-11-18 5:17:28 PM|| [http://brighterfuture.blogspot.com] 2004-11-18 5:17:28 PM|| Front Page Top

#17 You gotta back something like that up with facts when you say it...

Or tell us your underlying assumption about the future. How big a war are you expecting, phil?

Posted by Mrs. Davis 2004-11-18 5:19:44 PM|| 2004-11-18 5:19:44 PM|| Front Page Top

#18 "One other thing, the world economy was more globalized in 1913 than it was in 2003."

Meant to quote that part also.... That's actually the part I'm most skeptical of in your statement.

Posted by Damn_Proud_American 2004-11-18 5:24:06 PM|| [http://brighterfuture.blogspot.com] 2004-11-18 5:24:06 PM|| Front Page Top

#19 My $0.02: Agree with scenario of much higher US interest rates and a crash in housing prices, but only in certain hypergrowth coastal property markets.

I'd guess that crash is most likely in the downtown condo markets (Manhattan, SF, Boston especially) and in the ex-urbs way out from the cities where speculative new home building has been fiercest (formerly rural New Jersey bumf*ck nowhere counties, for ex).

But unlikely in the blueblood suburbs and other toney places that had the wisdom to artificially restrict new home supply via, for ex., environmental restrictions (Palo Alto/Atherton, eg).

My own long-term strategy is to find a place in the Rockies <2 hrs from Colorado Springs, get broadband, and run my own business from there. Best to reduce expenses wherever possible. And no letdown in real estate appreciation potential in the gorgeous mountain areas. Better than buying an overvalued Dow, anyway.

Posted by lex 2004-11-18 5:44:37 PM|| 2004-11-18 5:44:37 PM|| Front Page Top

#20 "One other thing, the world economy was more globalized in 1913 than it was in 2003."

Phil's probably right. Back in the days when he was still an excellent international trade economist instead of a full-time moonbat, Krugman used to point out that as a % of GDP our foriegn trade is tiny: ~8%. And even in the most internationally-oriented of the major economies, Germany's, foreign trade accounts for only ~12% of GDP.

And in the period 1865-1913, there were enormous cross-border financial flows funding huge, capital-intensive public works projects such as railroads spanning North and South America as well as Russia and imperial territories in Asia and Africa, as well as gargantuan projects like the Suez and Panama Canals. I'd bet that the average English aristocrat's investment portfolio in 1913 had far more international exposure than the average high net worth personal account at Merrill today.

Posted by lex 2004-11-18 5:52:02 PM|| 2004-11-18 5:52:02 PM|| Front Page Top

#21 At the beginning of the 20th century South America was a powerhouse, in particular Argentina was an immigration country on its way to grow as prosperous as the USA.

Then the Europeans and Latin Americans switched to national-socialism (aka fascism and nazism).

Posted by Kalle (kafir forever) 2004-11-18 6:41:04 PM|| [http://radio.weblogs.com/0103811/categories/currentEvents/] 2004-11-18 6:41:04 PM|| Front Page Top

#22 Trust the market folks. It's smarter than any of us because it is comprised of all of us.

Posted by Classical_Liberal 2004-11-18 9:26:24 PM|| 2004-11-18 9:26:24 PM|| Front Page Top

#23 DPA, I'll amend my statement to the world economy was more globalized in 1913 than it was in 1973. Whether the world has surpassed the level of glbalization reached pre WW1 is open to discussion if you factor out things like oil and countries are smaller and there are more of them. HEre is a long IMF report. See particularly table 2.1 and associated text.

I don't see a war. What I see is an end to an International order based on free-riding.

Posted by phil_b 2004-11-18 11:08:44 PM|| 2004-11-18 11:08:44 PM|| Front Page Top

00:00 BigEd
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