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  1. #1
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    Default “The dollar will go to new lows as the U.S. attacks its currency”

    Bloomberg.com: Worldwide

    Dec. 15 (Bloomberg) -- The biggest foreign-exchange strategists and investors say the best may be over for the dollar after a four-month, 24 percent rally.

    The currency weakened 5.9 percent measured by the trade- weighted Dollar Index after strengthening between July and November as investors bought the greenback to flee riskier assets and repay dollar-denominated loans from lenders reining in credit. Ever since peaking on Nov. 21, the dollar fell against all 16 of the most-widely traded currencies, according to data compiled by Bloomberg.

    U.S. policy makers are flooding the world with an extra $8.5 trillion through 23 different plans designed to bail out the financial system and pump up the economy. The decline shows that the increased supply of money may be overwhelming investors just as the government steps up debt sales, the trade and budget deficits grow and de-leveraging by investors slows.

    “The dollar will go to new lows as the U.S. attacks its currency,” said John Taylor, chairman of New York-based FX Concepts Inc., which manages about $14.5 billion of currencies.

    Citigroup Inc., Goldman Sachs Group Inc., BNP Paribas SA and Bank of America Corp. predict further weakness. Last week was the first time in almost a month that consensus estimates for the dollar against the euro through 2009 fell, according to the median forecast of 47 strategists surveyed by Bloomberg.

    Taylor, whose firm manages the biggest hedge fund focusing on foreign exchange, said while the dollar may strengthen next year, it will fall to a record low against the euro in 2010 and to a 13-year low of 80 per yen as soon as 2009.

    The dollar fell to 90.68 yen as of 2:11 p.m. in New York from 91.21 on Dec. 12. It declined to $1.3678 per euro and traded at $1.3703, its weakest in two months, from $1.3369.

    ‘Turning Point’

    Speculation that the dollar has peaked gained steam last week as the currency plunged 4.9 percent against the euro to $1.3369, its biggest drop since Europe’s common currency was created in 1999. It weakened 1.75 percent versus the yen.

    “We’re at a turning point in terms of dollar dynamics,” said Jens Nordvig, a New York-based strategist at Goldman Sachs, the biggest U.S. securities firm to convert to a bank. “The dollar shortage has been addressed and we’ll see people start to focus on other things and those are all dollar negative.”

    After rising from $250 billion in September and October, dollar cash positions at U.S.-based banks have stayed at about $800 billion since Nov. 1, according to Nordvig.

    A survey last month by New York-based Sanford C. Bernstein & Co. found that 63 percent of hedge-fund managers said they are about half done selling securities to reduce their use of borrowed money after financial companies cut back on credit following almost $1 trillion in writedowns and losses since the start of 2007. Twenty-three percent said they were three- quarters finished.

    Yen Example

    Goldman Sachs says the dollar may weaken to $1.45 per euro by the end of next year. Up until Dec. 11, the firm forecast that it would end 2009 at $1.30. The median estimate in a Bloomberg survey is for the currency to finish next year at $1.25.

    Dollar bulls say it’s a mistake to bet against the currency now because Treasury yields are falling to record lows even as the government prepares to sell more than $1 trillion of debt, a sign there’s no end in sight to demand for the safest U.S. assets. They also say the yen, which typically rallies as risky assets decline, is appreciating.

    “The yen’s strength falls into our theory that the risk- aversion trade is not off the table,” said Peter Rosenstreich, chief market analyst at Geneva-based currency trading firm ACM Advanced Currency Markets. “The fact that the yen continues to gain strength validates our theory in the longer term, the dollar safe-haven trade is not done yet.”

    ‘Bad News’

    Robert Sinche, the head of global currency strategy at Bank of America in New York, the third-largest U.S. bank, says the dollar is bound to weaken because investors are starting to focus on traditional measures of value such as relative interest rates, budget deficits and trade balances.

    As more loans are repaid, there is less need for dollars, forcing investors to value the currency on metrics such as relative interest rates, budget deficits and trade balances. By those measures, the greenback should weaken, according to Sinche.

    “A lot of the reasons why the dollar went up are not sustainable and have started to disappear,” said Sinche, who predicts the currency will weaken to $1.44 per euro as early as March 31. “Bad news about the U.S. economy is beginning to be bad news for the dollar.”

    Lower Rates

    The Federal Reserve will cut its target rate for overnight loans between banks in half to 0.5 percent on Dec. 16, the lowest level since 1958, according to the median estimate of 84 economists in a Bloomberg survey. The European Central Bank’s target rate, currently 2.5 percent, will bottom in 2009 at 1.75 percent, according to a Bloomberg survey of economists, making the euro relatively more attractive.

    Treasuries due in two years yield 1.49 percentage points less than German bunds of similar maturity, near the most since mid-October. Three-month bill rates fell below zero last week for the first time. Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., which oversees the world’s largest bond fund, said “Treasuries have some bubble characteristics.”

    “The government and the Fed cannot continue to talk about trillions of dollars of financing and expansion of the Fed’s balance sheet without the dollar going south,” Gross said in a Dec. 10 interview with Bloomberg Television

    Budget Deficit

    Spending to shore up the financial system caused the U.S. government’s budget deficit for the first two months of fiscal 2009 that started in October to balloon to $401.6 billion, the Treasury Department said Dec. 10.

    “It’s absolutely going to get worse before it gets better,” said Michael Englund, chief economist at Action Economics LLC in Boulder, Colorado. “We’re looking at a $1 trillion deficit, and that’s before the next stimulus package. If Treasury spends all of TARP, it could be $1.2 trillion to $1.3 trillion.”

    The $700 billion Troubled Assets Relief Program is one of the programs set up by the government and the Fed to try to bring the economy out of the worst recession since World War II. President-elect Barack Obama also plans a stimulus package that House Speaker Nancy Pelosi said may total $500 billion to $600 billion.

    The dollar’s rally may have hurt the trade balance, and earnings of companies that depend on sales overseas. U.S. exports slid to a seven-month low in October, causing the trade deficit to swell to $57.2 billion, the Commerce Department said Dec. 11. American exports dropped 2.2 percent to $151.7 billion as foreign purchases of U.S. aircraft, automobiles, chemicals and food waned. The trade gap was projected to be $53.5 billion.

    Shrinking Economy

    The U.S. economy may contract 3.9 percent this quarter and 2 percent in the first three months of 2009, according to the median estimate in a Bloomberg poll.

    “Rapid deterioration in the U.S. economy, coupled with the adverse effects of monetary and fiscal stimuli, do not bode well for the dollar,” Citigroup strategists Todd Elmer, Michael Hart, James McCormick and Aerin Williams wrote in a report from New York on Dec. 12. The New York-based bank “foresees short- term dollar weakness, against both Group of 10 and emerging- market currencies,” they wrote.

    The Citigroup strategists predicted on Nov. 6 that the euro, which was trading at $1.2715, would rally toward $1.33.

    Paris-based BNP Paribas, Europe’s third-largest bank, recommends buying the euro versus the dollar amid signs that equity markets may be stabilizing. The MSCI World Index is up 16.6 percent since falling to a 5 1/2-year low on Nov. 21, the same day the Dollar Index peaked.

    ‘Positive Euro Bias

    “With equity markets broadly stable with a positive bias and volatility easing, we expect the euro-versus-dollar declines to be capped at the $1.28” level, a team of strategists headed by Hans-Guenter Redeker in London wrote in a report Dec. 10.

    Like Goldman Sachs, London-based Barclays Plc, the U.K.’s third-biggest bank, forecasts the dollar will weaken to $1.45 per euro by the end of 2009, according to data compiled by Bloomberg. New York-based Morgan Stanley strategists Stephen Jen and Spyros Andreopoulos, who in August advised clients to buy the dollar, said in a Dec. 11 report that the currency may strengthen in the first half of 2009, before “underperforming most other currencies” as the global economy recovers.

    “We’re seeing that correlation between equities and the dollar break down,” said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG, the world’s biggest currency trader, according to a 2008 Euromoney Institutional Investor Plc survey. “The fact that the dollar is weakening in this environment probably tells you a bit more focus is coming back on the fundamentals of the U.S. economy.”
    Hyperinflation cometh down the line. The situation is really getting to be surreal.

  2. #2
    WTF is this dude saying? A Schnitzel's Avatar
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    I don't know. It seems like a volatile relationship worth analyzing.

    Is he into her?
    Maybe, but not in that way.
    Is he a worthy catch?
    He used to be, but now is a little too shy to get anywhere.

    Neither of them want to show their cards, but they both want to get somewhere.

  3. #3
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    Gracias .

  4. #4
    DoubleplusUngoodNonperson
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    What makes you think a weaker dollar will be worse for the US in the time being? A weaker dollar means:

    -Higher incentives for foreigners to travel, which will uplift tourist heavy locations
    -foreign exporters will recieve less money for their exports, meaning we get the same products and contract services for less. This disparity will drop foreign imports and spur domestic production (which we desperately need)
    -Our debt (often verbalised in terms of US dollars) becomes essentially smaller

    A strong dollar is only good if you want to travel for cheap. China has understood what you gain by having a weak currency and kept their currency artificially low for decades

  5. #5
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    Quote Originally Posted by nozflubber View Post
    What makes you think a weaker dollar will be worse for the US in the time being? A weaker dollar means:

    -Higher incentives for foreigners to travel, which will uplift tourist heavy locations
    -foreign exporters will recieve less money for their exports, meaning we get the same products and contract services for less. This disparity will drop foreign imports and spur domestic production (which we desperately need)
    -Our debt (often verbalised in terms of US dollars) becomes essentially smaller

    A strong dollar is only good if you want to travel for cheap. China has understood what you gain by having a weak currency and kept their currency artificially low for decades.
    No, it is not a good thing. We are nothing like China because China has essentially gone the direction we used to be in, while we have been going down the road of borrowing credit and debt. We have gone down the road of being consumers and not producers. In this climate, the devalutation of our currency would be trememndously harmful. Look at what Russians are doing. Their economy is going back to the way it was in the 80's. They're facing a collapse in the Ruble, and guess what their first instinct was? They went and bought up diamonds, gold, and even DOLLARS! Why did they buy those things? Because they were looking for any secure investments, more secure than their own currency. If we continue to devalue our dollar, however, we will no longer be considered a safe investment.

    China holds a vast amount of our debt, and a great amount of dollars. In this climate especially, as our currency loses value and our economy falls, and it becomes apparent we wont be able to pay back our debts, guess what China and other creditors to the U.S. are going to do. THEY ARE GOING TO DUMP OUR CURRENCY. What does that mean? That means inflation. That means we will be paying a great deal more for foreign goods. Our credit rating will likely drop from AAA rating, meaning it will be even harder for the U.S. to borrow money. Our economy is now Dependant on borrowing money and creating debt, and we are seeing that bubble bursting before our eyes. Sadly, not enough people get it yet. And what this means is we will not be able to afford goods and services from other nations.

    When the currency gets low, a nation should be able to rely on producing more to balance it out, but guess what!? WE AREN'T PRODUCERS ANYMORE! We don't have that same foundation to fall back on the way China does. The dynamic doesn't exist for us, not anymore. We'll be stuck not being able to borrow money and not being able to afford nearly as much. That means a reduction in everyone's lifestyles, of the states' wealth, and the already sinking economy. A devaluation of our dollar is not a good thing and I'm not sure why anyone would believe that considering the current state of the nation. It's one thing to look and say "A causes B in this given situation.", that's fine and dandy, but this is not that situation. You've gotta see the big picture and the entire scope of things.

    Look, lets consider companies that depend on imports. A lot of companies depend on being able to buy goods outside the U.S. cheaply, so they can turn around and sell them to U.S. customers at a good price (again, we are consumers, not producers). If the currency begins to crash, then the price the business must pay to get the same goods goes up. It goes up due to the currency exchange rate favoring the supplier instead of the buyer (the company), plus any number of factors increasing the costs of getting those products into the U.S. So how does the company make up for the price difference? They are forced to jack up prices to their customers in the U.S. Ok, so we've established a basic look at how goods face price inflation. But so what?

    The so what is, what happens when you start to see the inflated price of good plus the other effects of an inflated currency added to an already faltering economy with growing job losses and sinking wages. Well my friend, then you have really hard times. Then you're really trying to run up a slippery slope like an ice hill lubricated with WD-40. That's the point.

    I'll even tell you how a falling currency effected me a year or so ago. about 5 years ago the exchange rate for the U.S. dollar and the Australian dollar was about 55~60%. A hundred USD equaled 55~60 AUD. I sell carnivorous plants, a luxury/hobbyist item. You can sell them at great premiums when you have great product from good sellers, such as my former supplier in Australia. However, there is a point at which the price becomes too much and you can't sell anything. In 2007, the USD was hitting all time lows against the AUD, to about the 80% range. What was formerly an extremely profitable business of importing plants from Australia and selling them to hobbyists in the U.S. was now in shambles. Both the costs of the plants themselves due to the currency rate and the cost of importing them had gone up tremendously. It became too costly to import them. I could not turn around and sell the plants for any profit worth the hassle of getting them into the states. My small business was kaput, all due to the falling USD. The same thing happened to a lot of other carnivorous plant sellers. They could no longer afford to import as much, and if they did, the costs of their plants went up SIGNIFICANTLY. Whats more, the faltering economy is making people tighten their wallets as well as the gas prices we had over the summer. Over that time, even the hobbyists weren't willing to spend as much as they used to, especially not with the rising prices, meaning less plants sold.

    A falling USD is a horrible thing for this country in this climate. And even this assessment is far shy of expressing the total picture here...

  6. #6
    Senior Member ptgatsby's Avatar
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    Quote Originally Posted by Risen View Post
    A falling USD is a horrible thing for this country in this climate. And even this assessment is far shy of expressing the total picture here...
    Hmm... I think you might have this backwards. Your description depends on the bad factor being deflation... The actual falling dollar tends to be relatively good for the economy, although individuals do suffer. However, it really all comes down to inflation more than currency.

    The only reason to dump the currency is if the rate on it depreciates dramatically, which a falling dollar does; but at the same time, that falling dollar isn't supported unless there is inflation.

    The big question now is if there will be inflation. All of the doom and gloom is built upon inflation taking off. I actually don't see it yet, personally. But we are on the edge, and no one knows which way it will fall. However the bank isn't really printing money like mad the way most people think - it's injecting a lot of money, but it isn't on the scale that people talk about. Most of it is liquidity issues, which means no real creation or destruction of wealth. They are simply trying to make sure that bonds (ie: reserves) are not destroyed, leading to rapid deflation.

    The short of it is - if you expect inflation, you then you can expect the US currency to drop. It has done the reverse so far, as dramatically as it fell. The reason for that is the contraction in the money supply - deflation - while inflation was a reasonable guess at the start of the financial crisis. No one really knows which way it will work out yet, IMO. But that never stops people from guessing!

  7. #7
    Senior Member Lateralus's Avatar
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    One positive of a falling dollar is that it would become more cost effective to manufacture in the US. The US would be a very attractive place to build manufacturing plants because we have huge human capital and infrastructure advantages over most nations.
    "We grow up thinking that beliefs are something to be proud of, but they're really nothing but opinions one refuses to reconsider. Beliefs are easy. The stronger your beliefs are, the less open you are to growth and wisdom, because "strength of belief" is only the intensity with which you resist questioning yourself. As soon as you are proud of a belief, as soon as you think it adds something to who you are, then you've made it a part of your ego."

  8. #8
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    Quote Originally Posted by Lateralus View Post
    One positive of a falling dollar is that it would become more cost effective to manufacture in the US. The US would be a very attractive place to build manufacturing plants because we have huge human capital and infrastructure advantages over most nations.
    It would help some, but the detracting force to manufacturing in the U.S. is mostly due to government regulations on business and manufacturing that make it far too costly compared to other countries. Again, the falling dollar wont help us at all when we are a consuming nation that no longer has a huge production capacity the way it used to.

  9. #9
    Senior Member Maabus1999's Avatar
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    Not sure about hyperinflation (it has a chance) but I am very concerned about a "Lost Decade II".

    In fact the two scenarios I see possible are either A.) Lost Decade II or B.) Great Depression II.

    Course I wouldn't call it a depression or any sorts. It would be more of the Great Collapse if the statistics come to the point to compare to the GD.

  10. #10
    Oberon
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    There are some sectors of manufacturing that never died out in the US, and are not ever likely to. Pharmaceuticals, for example. Pharma remains in this country in a big way because the regulatory environment makes it quite involved to get a foreign plant's products into the US.

    <-------- Production Supervisor Mouse

    People do it, it's true, but not everyone does, and so we'll always have drug manufacturing in the US.

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