Posts filed under “Currency”
Charle Hugh Smith is an author. He blogs at Of Two Minds.
If we shed our fixation with the Fed and look at global supply and demand, we get a clearer understanding of the tailwinds driving the U.S. dollar higher.
I know this is as welcome in many circles as a flashbang tossed on the table in a swank dinner party, but the U.S. dollar is going a lot higher over the next few years. For a variety of reasons, many observers expect the dollar to decline against other currencies and gold, the one apples-to-apples measure of a currency’s international purchasing power.
The tailwinds pushing the dollar higher are less intuitively appealing than the reasons given for its coming decline:
1. The Federal Reserve printing another trillion dollars (expanding its balance sheet) will devalue the dollar because money supply is expanding faster than the real economy.
2. The Fed is printing money with the intent of devaluing the dollar to make U.S. exports more competitive globally and thereby boost the domestic economy.
Let’s examine each point.
1A. If much of the Fed’s new money ends up as bank reserves, it is “dead money” and not a factor in the real economy. Fact: money velocity is tanking:
1B. Money is being destroyed by deleveraging and writedowns. This is taking money out of the real economy while the Fed’s new money flows to banks.
1C. The purchasing power of the dollar is set by international supply and demand, not the Fed’s balance sheet or the domestic money supply.
February 11, 2013
“Currency War” is the latest hot title. It’s now on the front pages, triggered by the policy change in Japan. In only two months the Japanese yen has weakened about 15% against the US dollar.
Let’s reflect on this important development.
First, a simple case study. Suppose there were just two countries and just two currencies. Suppose country A decided to try to weaken its currency so it could sell more stuff at cheaper prices to country B, thus undercutting B’s domestic producers. B could resist by raising a tariff on the incoming stuff that A was trying to sell. Or it could retaliate by cheapening its own currency to counter the price differential. The first form of retaliation is a trade war; the second is a classic currency war. The economic history of the 1930s is replete with examples of each and combinations of both. History shows us that the results were disastrous for the global economy and led to a world war.
But is there a third alternative? What about the role of interest rates?
War Games By Grant Williams January 29, 2013 The Asian currency crisis of 1997 contained the seeds of an East vs. West currency conflict, but catastrophe was averted, despite the damage that was done to the US deficit and the seeds that were sown for a decade-long war of words between the US…Read More
click for ginormous chart Source: FT Alphaville Fantastic annotated chart from Morgan Stanley by way of FT Alphaville
The Australian Central Bank, the RBA stated that it had increased sales of the A$ last month to a number of buyers, including foreign central banks. The sales amounted to US$500mn, the most since June 2009. The A$ declined on the news – currently US$1.0337. For full disclosure purposes, I remain short the A$, against…Read More
From start to finish of the 2008-2012 term the USD only lost approximately 3% to the Euro. There’s been quite a few 20% moves in between making it challenging for both buyers and sellers.
As a reminder, the Dollar’s Biggest Decline was from 2001-08 — down 41%
Nov.6, 2012 Election day, trading at approximately 1.28