Posted on 05/19/2003 1:00:04 PM PDT by Hal1950
WASHINGTON (AFP) - Nerves gripped investors worldwide after US Treasury Secretary John Snow appeared tacitly to abandon an eight-year policy of supporting a strong dollar.
The perceived shift raised fears that further dollar declines would erode the value of foreigners' US investments, economists said.
And while soothing concerns of deflation in the United States, it also ramped up those same fears in Europe, and complicated the long deflation battle in Japan, they said.
"What the United States has made clear is that they are not going to undertake any efforts to try to defend the currency," said Citigroup global currency strategist Robert Sinche.
"We think that is exactly appropriate in this environment," he said.
"In a world where the major concerns appear to be about deflation rather than inflation, the last thing the world economy needs is to have the United States trying to artificially tighten policy."
US Treasury Secretary John Snow described recent currency fluctuations as being "really fairly modest" during a weekend Group of Seven finance ministers in Deauville, France.
A "strong dollar" policy did not mean that the currency should be at any particular exchange rate, he said, emphasising that it incorporated other values such as confidence, or being a good medium of exchange.
The euro rose to 1.1720 dollars in late morning deals in Europe, against 1.1581 on Friday in New York.
In Japan, already battling deflation for four years, the authorities in Tokyo intervened heavily to prevent a yen appreciation. The dollar tumbled to 115.13 yen from 115.90 on Friday.
"I think for the longest period of time in effect the dollar exchange rate has been market-determined," said Moody's Investors Service chief US economist John Lonski.
Chronic deficits in US financial dealings with the outside world -- shown by a current account shortfall of more than half a billion dollars last year -- might have caught up with the currency, Lonski said.
"We are simply not able to attract as much foreign capital as we need to prevent the dollar exchange rate from moving lower. I wonder how much of this is really the product of any change in policy," he said.
Major investors in dollar-denominated assets also might have decided to diversify because of heightened geopolitical concerns, Lonski said.
In addition, the US Federal Reserve (news - web sites) had cut the key federal funds target rate to a four-decade low of 1.25 percent. Lower rates reduce the returns on US investments, eroding demand for dollars.
For now, the slide in the dollar worked in favor of the US economy, where underlying inflation fell to a 37-year low of 1.5 percent in April when compared with April 2002.
"One of the perfect antidotes for deflation is a weaker currency," Lonski said.
But "in Europe, it has the opposite effect," he added.
The appreciation of the euro, and the higher risk of deflation, might force the European Central Bank to cut rates sooner, the analyst said.
"The attack against deflation becomes globalized if the ECB decides that it has no choice but to cut rates pretty soon." The ECB holds its next meeting June 5.
In Japan, the Bank of Japan had waged a long battle in vain against deflation. "The last thing they need is a further appreciation of their currency," Lonski said.
Snow would still step in to support the dollar if the decline ran out of control, leading to a flight of funds from both the equity market and the bond market, he predicted.
"Snow made it perfectly clear, the strong dollar policy has been abandoned up until we reach that point where expecations of further dollar weakness prove to be disruptive to US financial markets," Lonski said.
Wall Street tumbled Monday. The Dow Jones industrials average of 30 top stocks plunged 171.33 points or 1.97 percent to 8,507.64 by early afternoon. But the bond market held up relatively well, Lonski said.
"If both equity and credit markets deteriorate together, chances are the dollar depreication will no longer be tolerated by the US government," the economist said.
Which are the leading oil exporting countries? Saudi Arabia, Iran, Iraq, Algeria, Venezuela and Russia. If you are right they hold the lever to pick the world currency.
Asia, its reserves and the coming dollar crisis
[I see someone just reposted that one..]
It's about time. I need to get some of that gold out of my mattress. My back is starting to go to he!!... The lumps are killing me.
That would be just above pre 1991 levels of 3.1-3.3 million barrels and would certainly not break OPEC price controls. It's also right in the midst of the aforementioned 18-36 month reconstruction period estimated by the James A. Baker III Institute and the U.S. Dept. of Energy.
The other OPEC states, particularly Saudi Arabia, could easily accomodate at least 2 million additional barrels of Iraqi oil production above 2002 levels before OPEC price controls were seriously threatened.
Moreover, by the time Iraq is capable of producing that quantity of oil - sometime in perhaps 2007 or 2008 - there's an excellent probability that both Britain & Norway will be in the eurozone.
Finally, there is little reason to believe that Russia would fail to cooperate with a shift from dollars to euro if that were generally agreed upon by the other oil exporting nations aside from Iraq.
Sooner or later, the dollar will have to stand or fall of its own accord - that was inevitable from the day the euro went into effect.
More or less, yes. Europe is sliding into recession (again) and needs to cut rates. Enough rate cuts by the Euros would help bring the currecies closer to parity.
All of which leads us to the nightmare scenario. It comes up every few years, and it goes like this: All those global portfolio managers, worried about the hits they're taking from the dollar, are going to start selling U.S. assets which is going to: A) send U.S. stocks lower and B) further damage the dollar. Which is only going to make the global investors (and U.S. ones) more twitchy, and beget more selling. Which will beget more selling. Pretty soon you have a massive rush to exit U.S. assets, and a global financial catastrophe.
Here's another recent analysis of interest, from CNBC/MSN Money:
Fantasy, the Fed and the falling dollar
At present, folks are complacent about the dollar's slide. This is the way it always works. As I have written before, when a currency starts to decline, it is initially deemed to be a positive thing: better for profits, better for exports, etc. At some point, central-bank jawboning will commence and volatility will pick up, though at some point, this phase of the slide in the dollar will stop, and we'll have a bounce. People will say, well. that's over with and it's stabilized, or some variation on that theme.
In the currency markets, once a trend begins, it tends to go on much longer and carry much further in whatever direction it's headed than you would think possible. Further, currency problems are unique in that they don't matter until they matter. Then, they are the only thing that matters, and there's nothing you can do about it. That's basically what happens, and then you have a crisis. A mini-version of this occurred in 1987, but that's the only time we've had any kind of a real currency problem since the Carter administration. (There was a problem brewing just before the first Gulf war, but that war and what came next solved it.)
Now the question at hand is whether all that may finally take place, or whether this is just another routine episode of unfounded alarmism as described by the CNN/Money article.
Yes, thru John D. Rockefella banks as well.
I read on FR that last year Saddam was going to price his oil in euro's....and perhaps that was the real reason for the invasion; send a clear message to the oil-producing world as to which currency is 'appropriate'.
Didn't Nixon take us off the gold standard around the same time of the 'oil crisis'?
motor, help me out here.
I understand there is about 9 trillion dollars in circulation in the US today. I also understand there is only 600 billion actual real dollars in the US today.
What is it that happens if a major creditor of the US calls the notes.
Do we just print some more money to pay, or what.?
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