|
by Jerome a Paris  RGE Monitor had this to say, in its email newsletter:Does the U.S. dollar's December slide mean the USD has passed its peak? Most likely not. The turn-of-the-year profit-taking on long USD positions creates a near-term blip in the dollar's uptrend but doesn't alter the medium-term trend of appreciation versus the euro. The four horseman of the carry trade apocalypse - Deleveraging, Risk Aversion, Growth Differentials and the Dollar's Reserve Currency Status - would need to retreat before we see a sustained pullback in the EUR/USD from the slide to near-parity ($1.10-$1.30). Governments, banks and other firms are still scrambling for dollars to repay their USD-denominated debt while signs of global recession and credit crisis spur on the flight-to-safety in U.S. Treasuries. European sovereign bonds offer an alternative but inferior safe haven because of the European bond market's fragmentation and exposure to emerging Europe. More aggressive policy response in the U.S. compared to Europe, could bring the U.S. out of a recession faster than the Eurozone (though growth will most likely remain subdued for some years to come), supporting the dollar against the euro. In the longer term, however, once risk appetite revives, the greenback might lose its defenses in wake of worries surrounding U.S. public debt expansion and the potential inflationary effect of quantitative easing. I think we're rather beyond a "blip" when the dollar and the pound have both lost no less than 15% in less than 10 days. We're in crash territory right now, as the evidence that monetary policy interventions have failed and worries about the UK and US economies continue to mount. We're still in that strange territory where fears of both deflation and inflation are heightened.
To get back to the currency issue, the above article is correct in that Deleveraging has recently strengthened the dollar, but that process has now largely run its course. The hedging fund industry has shrunk by half over this year (mostly in the second half) and that movement that sent funds back to the dollar (via liquidation of foreign assets by US or dollar-based investors) is now mostly over. The Growth Differential argument is dubious at best, as the optimism that the Fed was more reactive than the ECB and would boost the US economy more effectively is bumping against the evidence that the slump is getting worse by the day everywhere, but even more so in the US, a reflexion of the deep imbalances that need to be cured. Risk Aversion is likely to favor German Bunds as much as US Treasuries, and the Currency Reserve argument is one until it isn't, ie it is a post hoc constatation rather than an irrevocable reality. The fact is, we're getting overwhelming evidence that the "success" of the Anglo economies in recent years was counterfeit, that GDP growth was fake (even if its increasingly unequal sharing was very real), and that a lot of dollar-based and pound-based value is dubious. The autumn burst came from liquidation, now the underlying trend is coming back, rather than the other way round as RGE suggests.
|
Menu
. Home
. About . Contact . New User Guide . FAQ . ET Editorial Guidelines . Search . Search (Google) Login
|
||
|
Currency crash | 115 comments (115 topical, 0 editorial, 0 hidden)
Currency crash | 115 comments (115 topical, 0 editorial, 0 hidden)
| ||||
| ||||
I've had the image for a long time that our Anglo Disease-distorted economies were like an inverted pyramid, which which kept on building higher and higher, which increasingly precarious stability. As instability builds up and the pyramid leans, policy-makers try to push back, with the risk of making it fall the other way. Lately, as it started falling on one side, the pushback has been all the more violent, and it's still not clear if it has prevented the fall or only pushed it irreversibly in the other direction.