Posted on 09/26/2007 1:27:44 AM PDT by bruinbirdman
Can sentiment get any worse? As the dollar flirts with all-time lows on a trade-weighted basis, the smell of approaching capitulation is in the air.
The bears have plenty of fodder. A need to rebalance the huge current account deficit has provided a solid long-term case for dollar weakness. The prop of higher-yielding dollars has been eroded by rising interest rates abroad and now pummelled by the Federal Reserve’s half-point cut.
Meanwhile, the US slowdown is piling on the pain. Tuesday’s horrible housing data again raise the spectre of real estate acting as a significant drag on the US economy and forcing deeper interest rate cuts.
That provides a fertile backdrop for further dollar jitters. Last week, when Saudi Arabia failed to match the Fed’s rate cut, it triggered panic that the symbolically important dollar peg might be abandoned. Currency pegs usually explode because the reference currency gets relatively too strong, not because it becomes a lead balloon. There is an outside chance the Saudis, facing inflationary pressure, will follow Kuwait’s move earlier this year when it re-pegged to a basket of currencies. But even if that were to happen, the impact would take time to feed through. The dollar would remain pivotal in any currency basket and dollar reserves would remain high.
Finally, investors are giving the dollar an extra kick because many believe the global economy has decoupled somewhat from the US. While unproven, the idea is that other countries remain healthy as the world’s biggest economy slows.
A gradual decline in the dollar’s value against managed currencies like the Chinese renminbi will continue. Against other major currencies, such as the euro and sterling, potential for more bad US economic news should keep the dollar under pressure short-term.
Further out, however, much of the gloom might now be factored in. Any growth hiccups in Europe would make traders reassess relative bets against the dollar. And, if sharp dollar falls continue, expect central banks themselves to start talking about how to stem the slide.
But Larry Kudlow PROMISED ME that a 50bp rate cut would be good for the dollar... Dunce.
Result of rate cut won't be felt for months. Meanwhile, traders are sending $ down, or, put another way, other currencies up.
Some think a low $ is a good deal. Exports will certainly increase. Lower rates make Kudlow's bond holding go up immediately.
yitbos
http://kudlowsmoneypolitics.blogspot.com/2007/09/now-is-time.html
"If central bankers would come to their analytical senses, they would appreciate that today’s financial panic is itself sufficient reason to slash the Fed funds target rate by at least a full percentage point from today’s 5.25 percent to something around 4 percent. New cash needs to be poured into the liquidity parched banking system. Such a move would be a much-needed injection of confidence into a rattled marketplace. In addition, a lower fed target rate would not only deliver much needed addition to bank reserves, but would help to raise asset values across the board by dropping the cost of money. A pro-growth Fed policy will actually strengthen the beleaguered US dollar and reduce the price of gold."
How soon before we see a $1.50 Euro?
imports here, exports here, savers here, borrowers there...only the market can efficiently allocate the proper balance for optimal growth.
The Fed playing around with rates instead of letting the market float them is not going to be good for the dollar.
IMHO the best way to save the dollar right now is to cut taxes especially the corp tax, which is way to high even compared to Europe. But that is up to congress, not the fed.
he thinks a rate cut is a tax cut. No, the interest rate is not a tax and would be set by the market if there was no fed.
When you're running a confidence game, there is nothing more important than confidence.
BUMP
>> Some think a low $ is a good deal. Exports will certainly increase.
A low $ might be wonderful... for a robust manufacturing economy that exports.
Remind me again how that helps /our/ economy, which is built on domestic construction of overpriced housing, government employment, health care, sports and entertainment?
The dollar will rebound? That is good news for me to plan next trip to Europe. So, when may I go?
I remember the $.90 EU back in 92 but I have returned about every other year with more pain.
‘02 not ‘92
Appears an apology is owed Mr. Kudlow.
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