" The dollar continues to edge closer to the cliff."

[donsu]

http://www.atimes.com/atimes/Global_Economy/II25Dj04.html


Daily Forex Commentary


-snip-

Talk about being between a rock and a hard place. The dollar continues to edge closer to the cliff. The Fed is banking on low core inflation as justification for additional rate cuts. Something may not wash here.

If the buck breaks down into overshoot territory - the Treasury (though the Fed) will have to muster some real defense, not just the usual sheepish pronouncement, "We maintain a strong dollar policy." Thus, the dollar could lead rates higher.

Higher US rates might exact more pain for the US economy - further endangering growth and further solidifying the view that global growth is decoupling. Which would of course not be good for you know who - the dollar.

And there is the odd chance that in the midst of this we could see China give the world what it wants - a much faster increase in the value of its currency. Why? Inflation is ramping up quickly. And inflation in China is a serious social problem, more so than in the West because a much greater percentage of the average budget for a Chinese family goes toward those things inflating the fastest - food, energy, housing, etc. And of course, if the Chinese do finally allow a much faster increase in the value of their currency, their need for holding US dollar reserves will likely shrink (ie much of the reserve that has built up comes from the pegging process). And dollar for dollar they can buy more oil with a stronger currency (and every other major raw material they input - including pigs). At minimum, if this plays out, it could be yet another sentiment hit to the dollar.

But, if for some reason (political, environmental, financial) China stumbles here, the dynamics for the buck could change quickly. For it seems China is the key to the global growth story. Relative bad news from the United Kingdom hasn't done it. A big slowdown in the euro-zone services reported last week hasn't done it. Japanese political turmoil hasn't done it.

So, you know the old saying, as China goes, so goes the dollar.
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[Demeter]

1. Waiting for the Wiley Coyote Moment

when the economy realizes that it went off the cliff a while ago and is running full speed into the abyss...

[ixion]

3. yep, just like this...

[no_hypocrisy]

2. Raising the interest rate is one way to bribe other countries to buy our debt.

[Demeter]

6. Why? It Will Be Even More Worthless

The nature of inflation is too much paper money--more will not improve it.

The only cure, in fact, will be taxing the ill-got gains of the rich and the corporations to retire some of that worthless paper. And bringing manufacturing home.

[Warpy]

4. The next rate cut might just do it,

and the bond forecasters are predicting one more half point rate cut.

The short term will be extremely unpleasant for all of us as all those products we used to make start to show the full cost of building them elsewhere and shipping them here. We'll finally see gas prices that tell us why moving to the exurbs an hour away from our jobs was not a good idea.

The long term will probably improve, as products that are still made here start to look attractive offshore and products that are made offshore and used primarily here will start to be made here once again.

The key is China, and whether they've developed alternative markets enough and whether the US market has fallen enough that they'll risk letting the Yuan float.

[cliss]

5. I think the US policy has been

to let the dollar go down in value. In particular, John "Snowjob" Snow made it sink dangerously low. I've read that they are OK with letting the dollar fall to about 1/2 its value.

That's Catastrophic with a capital 'C'.

On China: I think they are pissed as hell about what the US is doing right now. There's not much they can do about the currency issues. I think at some point, they will want some "hard" value for their holdings. Like, I can see them coming to the US and buying properties, buildings, offices, BUSINESSES, companies, corporations.

They have about $1 Trillion in cash that's an awful lot of stuff.