Rubin Wins Some, Loses Some on Deficit Warnings: Mark Gilbert

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http://quote.bloomberg.com/apps/news?pid=10000039&cid=gilbert&sid=ad8MJzs4fUwU

Rubin Wins Some, Loses Some on Deficit Warnings: Mark Gilbert

Dec. 16 (Bloomberg) -- At the start of the year, former U.S. Treasury Secretary Robert Rubin put his name to some predictions about the potentially ruinous consequences of the U.S. failing to put its deficits on the economic equivalent of an Atkins diet. A scorecard of how his soothsaying fared highlights the anomalies besieging financial markets as the year ends.

The currency market seems to have belatedly noticed the dangers posed by obese trade and current-account deficits. The bond market, meantime, is stubbornly refusing to follow the classic script that dictates higher yields as spooked overseas investors demand more bang for their buck as compensation for backfilling those deficits. They can't both be right.

Conventional theory may be wrong; currency traders may revert to ignoring the deficits, prompting a dollar rebound. A more likely outcome is a rude awakening in the Treasury market as money managers realize lending money to Uncle Sam isn't the safe bet it once was.

Rubin's headline worry was a dollar slump, threatening its role as the world's reserve currency of choice and making it harder for the U.S. to write checks to other nations that never get cashed, to fund its current-account deficit. The dollar has indeed taken a beating, dropping to a record against the euro and near a five-year low versus the yen.
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