Thursday, November 27, 2008

Last Christmas for the dollar ?

This is a day late, but it seems like maybe the right time to start talking about the dollar. There's no question that the people who have been talking for much longer than anyone else about the unsustainability of American policy from a financial point of view are the Japanese financial writers who contribute to the Nihon Keizei Shimbun, where the impossibility of the US keeping up the escalating twin deficits--fiscal and trade--has been a topic of dicsussion for a couple of decades at least. Which also highlights the fact that it is easier to be right about the inevitable direction of a market, than it is to figure out the timing.

So if you're trying to time the dollar-crash--and who isn't, these days--you might want to pencil in this from page 17 of the Nikkei yesterday (that would beThursday Nov 27). In a more or less routine market-reporting piece, the writer says there are signs the dollar may have topped out against the euro and the GB pound, adding: "This is because the FRB has announced a new financial measure that could amount to as much as $800 billion, and anxiety about the financial soundness of the FRB is starting to emerge." He notes that it is repatriation of foreign investments by US funds and others that has been responsible for the recent dollar-strength, adding: "But if confidence in the dollar is shaken, it is possible that there could be a turn [to dollar-selling] against the euro and other currencies."

US stocks and the dollar this week went in opposite directions in reaction to the $800 billion scheme. The Dow rose for three days in a row, but the dollar was sold off, dropping to 1.3 dollars to the euro for the first time in three weeks; and dropping to its lowest against the GB pound in two weeks. He quotes two people: Senior market economist at Mizuho Corporate Bank who said: "Attention is starting to be paid to the danger of the FRB balance sheet being impaired." As a result of its activities this year, the FRB balance sheet, which was less than $1 trillion at the beginning of the year, is now approaching $3 trillion. (It is a problem not only of size but also of quality. You are supposed to already know that the paper the FRB has been buying from financial institutions and lending against in recent times is not all, shall we say, of the very highest quality). US goverment debt, gold, and cash represented 90% of its assets at the beginning of the year, and that proportion is now only a little over 20%, the journalist notes, elaborating on the Mizuho person's comment.

The other person he quotes is the Tokyo chief foreign exchange strategist for Barclays Bank, who said there is another dollar-weakening factor here. The additional dollar-liquidity caused by these FRB operations makes interest rates drop, making the dollar less attractive. And he said in particular this latest ($800 billion) scheme "is going to be the occasion for a turn to dollar-selling."

The journalist concludes: The "Lehman shock" in September triggered a wave of dollar-repatriation, and as the year-end approaches, we can expect additional dollar-repatriation, this being also a seasonal phenomenon.
But a lot of people think that once this seasonal factor is behind us, the low-interest dollar, to the extent it has recently been bought against the euro and the pound, will be that much more prone to fall (against those two currencies). And also: If there is a turn to dollar-weakening, then the yen-rise/dollar-drop that up to now has been proceeding in a step-by-step way, could get an additional impetus.
So there you are. As far as I know, no one has suggested that if there really was any caving-in on the part of the US government vis-a-vis Iraq it might have had to do with crisis-avoidance owing to their consciousness of the dollar being on the brink. I'm not suggesting it either, I'm just saying.


Blogger Helena Cobban said...

Badger, I don't think it's just a case that "the dollar" is on the brink, in strict forex terms... Rather, the entire western financial-economic edifice is on the brink. This has undoubtedly affected Bush administration thinking on a broad range of foreign policy issues including both Iraq and-- perhaps even more pertinently-- Iran, and to some extent Taiwan. After all, the Chinese are now the biggest holders of T-bills and Fannie/Freddie stocks, and the support of Japan and the big Gulf SWFs is also pretty important... It's good to connect the dots explicitly and the attempt should be made, though it might require more first-order newsgathering resources than either you or I have.

On Iraq as such, though, I think the shift to downsizing is also motivated in good part by military (Dannatt-esque) considerations of the unsustainability of the mission at many levels, only one of which is economic.

8:12 AM  
Blogger badger said...

I don't try to be that grandiose, Helena, I am only pointing out that if you're interested in whether or when the dollar gets sold off (and a lot of people are, presumably including in the US administration), then you might want to notice that in the homeland of dollar-skepticism this particular $800 billion announcement earlier this week triggered some warning statements about a possible near-term turn vis-a-vis the euro and the pound.

And maybe some have taken notice. That's all. I leave the geo-theorizing to others.

9:06 AM  

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