Perhaps interest rates aren't the best universal guide for falling currencies...
Posted on 12/01/2004 11:42:47 AM PST by xsysmgr
This ignores the role of low interest rates in the determination of foreign exchange ratios. Nor does it discuss the term of the bonds/securities being bought. Short-term notes have no risk of capital loss due to rising rates since the time of maturity is short and they are paid off at face value when mature.
There is no way the dollar is not going to fall when interest rates are at the lowest point in decades.
The practice of exchanging dollars for gold (by foreign govs)was stopped in 71. Europe had been happily draining our reserve of its gold from the end of WW II until 1971. We are back up to 8000 tons in the reserve, while several European countries have been dumping, or are about to dump, gold into the market. Britain put nearly 395 tons, about half of their reserve, into the market two years ago. France plans to sell between 500 and 600 tons of the stuff over the next 5 years.
The dollar had been kept artificially high throughout the 90s, so this is the natural correction to that. The market is crying about our budget problems, and so buying Euros, all the while ignoring Europe's own massive budgetary woes. Eventually we will see a swing back the other way, especially if the Central Banks of Europe and Japan intervene to prop up the greenback.
Either way, I'm hedging my bets and putting money into metals to limit stock and bank exposure. Not too much, but just enough to balance any dollar losses.
Trade deficits grow when the economy expands and shrink when it shrinks. Thus, we could tank the economy and have the strongest currency in the world. This is a reason the Euro is strong because the continent has unemployment rates about twice ours.
Collapsing the economy is not the way to go.
How would that be a problem given that we have not had a convertible currency for over three decades?
They can "ask" all they want but the answer will always be "no."
Bartlett is smart. He's saying that spending cuts are the best solution, but he knows that's not going to happen easily with a "no veto" president who has the worst government growth addiction since LBJ. Tax increases can work to solve this problem. They aren't desirable at all, but then he's a policy realist, and maybe he's trying to get someone's attention.
all the while ignoring Europe's own massive budgetary woes
Yes, let's not forget about that. I did not know about the
gold exchange, thanks for the analysis, I feel much better now.
Agreed.
There are, however, significant differences between now and 1987. September/October 1987 was a classic bubble. Go back and read some of Martin Zweig's stuff on the euphoria that was in place at the time. We are currently in a range bound stock market. Also, interest rates peaked just before the crash. If I recall, 30 year treasuries hit 10% the Thursday before black monday. There is no such spike in interest rates at the moment.
That's pretty much what Greenspan said on November 19th.
However, the Euro is strong for a couple of reasons. Their interest rates are too high and some countries have started to use it as a reserve currency. An economic boom can cause a trade deficit, but a stagnant economy is rarely the cause of a strong currency.
They also increased their gold purchases by 25%. Keep in mind Russia just increased thier gold reserves by 5.5 billion in one week just before they announced possible restructure of us dollar reserves.
Perhaps interest rates aren't the best universal guide for falling currencies...
" but a stagnant economy is rarely the cause of a strong currency."
Thank you.
Argentina has been snapping up gold as fast as they can, just like the Russians.
I'd like to see the Euro take over as the top reserve currency for a time. It would give us some room to stretch our economic legs. There are far too many dollars floating on the market right now, so a pullback would be a good thing. We have released (read printed) more paper currency into the market over the last 4 years than at any time from 1792 to 1980... combined. Thats a lot of dollars.
In that regard they are different for now (but we could be in a similar circumstance in the future). I'm referring to the weak dollar, and what can happen. We'd had a weak dollar policy since 1985's Plaza Accord. The week before the crash Greenspan gave an interview saying the dollar would have to continue to be weakened for many years to come (at least that's the way it was reported). That was the last interview Greenspan gave. He now gives speeches and testimony only.
Jimmy Carter also had a weak dollar policy that went too far. Rather than a crash, we had a significant continous decline.
Small minded people tend to shout louder and more extreme things as they begin to realize that the masses are properly ignoring them.
Such people want attention, even if they have to make up reasons for people to listen.
I remember Zweig back around 1997 was asked by uncle Lou on Wall Street Week about the cause of the 1987 crash. I think Zweig said there was no particular single cause after Lou asked him if it was portfolio insurance. I think Zweig was the only major figure that predicted the crash, thus his fame.
My contention isn't that Greenspan caused the crash, but he triggered it with his reported statement. After all, I don't believe he'd even taken office yet.
A stagnant economy means fewer imports thus lower trade deficit and a higher currency.
LOL. I couldn't agree more. (back to ignore mode)
Changes in interest rates are one of the principle causes of changes in demand for currency. If rates are falling demand for the home currency falls and its value versus foreign currency falls. The opposite occurs when rates rise. Raising our rates would slow the economy, reduce demand for imports and increase the demand for the dollar raising the price.
There are only a few variables which affect exchange rates and interests rates are as important as any. Or at least the differential between the domestic and foreign rates. Euro rates are high relative to the US thus the Euro rises.
Is that the way it was in the 1970's? There are other factors that affect currency value than the trade deficit.
Don't worry about the dollar. Let the EU worry about the dollar......
Great line echoing General Patton....let the other sumbitch die for his country.
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