Croker Sack

"Democracy is the theory that the common people know what they want, and deserve to get it good and hard." — Henry Louis Mencken (1880-1956)

Saturday, November 06, 2004

What's down with the U.S. dollar?

What is likely to happen to the value of the U.S. dollar in the near future?

Is it silly for Deutsche Welle to attribute the recent low relative to the euro to President Bush's reelection?

Dealers were fretting about the economic implications of the electoral win of US President George W. Bush, analysts said.

"It's the same story we've had since the election result was made clear," said Chris Furness, currency strategist at the 4Cast economic consultancy firm.

"On the economic front we may well get growth, but we will get growth at the cost of higher deficits, certainly the trade deficit at least," said Furness, adding that the euro could hit 1.40 dollars within the next year.

At the BBC News World Edition there is no reference to the reelection of Bush, but there is a more worrisome description of the situation:

The fall came despite positive jobs data from the US Labor Office on Friday, showing that 337,000 new positions were created in the US in October - double Wall Street's expectations.

"What this (the dollar's fall) shows is that the structural problems in the US economy are completely dominating the positive cyclical news that we had today from payrolls [unemployment figures]," said Aziz McMahon, a strategist at ABN Amro in London.

"It seems now that the longer-term investors like pension funds and perhaps monetary authorities are either hedging their dollar risk or moving assets out of the United States.

"It looks like the dollar has further to fall," Mr McMahon said.

What kind of trading has George Soros been known for? How many people like him are there? Am I being unreasonably suspicious?

Update 7 Nov. 04: At MSNBC News there was a similar report, which included this description of the reaction of Chirac and Schroeder--and a prediction about currency traders' behavior in the near term:

In Europe, the stronger euro has raised fears that it will dampen what has been a moderate economic recovery because of a slowdown in exports. The euro is now 57 percent above its all-time low against the dollar of 82 cents from October, 2000.

French President Jacques Chirac said on Friday that he is “a little bit worried about the weakness of the dollar,” and hinted the European Union should take action. “This should provoke certain reactions on our part,” he said during a summit of European leaders in Brussels.

But Chancellor Gerhard Schroeder of Germany — whose economic recovery has been fueled by strong export growth — told reporters at the summit that he sees no reason for “serious concern,” adding that the exchange rate “is not yet dramatic.”

Analysts said that amounted to a green light for currency traders to press their bets because it is unlikely the Treasuries of those countries and the European Central Bank will intervene to reverse the euros rise.

The fundamental disagreement between French President Chirac and German Chancellor Schroeder apparently means that currency traders wouldn't be taking a big risk in the near future by betting against the dollar.

This part of the MSNBC report indicates that there is little reason for worry:

Commerzbank economist Christoph Balz said he expected to see the euro hit $1.31 in the next couple of months, but to settle in the long-term. “The U.S. economy is stronger than people think, which will lead to higher interest rates and make the dollar more attractive,” he said.

In addition, many analysts believe the Bush administration has deliberately sought a lower dollar in order to help U.S. exports.

It's true that U.S. exports can be aided by a lower relative value for the dollar, but it's also true that our imports will be more costly in many cases. How can anyone know whether the benefit will be likely to exceed the cost?


Blogger Al Hedstrom said...

I'm concerned about the amount of notes held my China, some hundreds of billions.

November 08, 2004 6:43 PM  

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