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Dollar’s retreat raises fear of collapse
Carter Dougherty, International Herald Tribune
FRANKFURT: Finance ministers and central bankers have long fretted that at some point, the rest of the world would lose its willingness to finance the United States’ proclivity to consume far more than it produces – and that a potentially disastrous free-fall in the dollar’s value would result.
But for longer than most economists would have been willing to predict a decade ago, the world has been a willing partner in American excess – until a new and home-grown financial crisis this summer rattled confidence in the country, the world’s largest economy.
On Thursday, the dollar briefly fell to another low against the euro of $1.3927, as a slow decline that has been under way for months picked up steam this past week.
“This is all pointing to a greatly increased risk of a fast unwinding of the U.S. current account deficit and a serious decline of the dollar,” said Kenneth Rogoff, a former chief economist at the International Monetary Fund and an expert on exchange rates. “We could finally see the big kahuna hit.”
In addition to increased nervousness about the pace of the dollar’s decline, many currency analysts now also are willing to make an argument they would have avoided as recently as a few years ago: that the euro should bear the brunt of the dollar’s decline.
(13 September 2007)
Dollar hits new low versus euro
BBC
The US dollar hit to new record low against the euro as investors fretted about a world credit crunch.
The greenback dropped as low as $1.3927 against the euro, deepening Wednesday’s losses, but regained ground later to settle at $1.3886 in New York trading.
The dollar has fallen in the past week, amid hopes that Federal Reserve will cut interest rates in a bid to reassure markets over current credit fears.
Analysts expect the Fed to cut interest rates when it meets next week.
However, as the dollar has weakened, the euro has gained momentum after recent comments from the European Central Bank (ECB) hinting at the possibility of future interest rate rises.
Further gains?
The health of Europe’s economy – underlined by strong growth and inflation figures from France – could help push the euro through the $1.40 barrier, some experts suggested.
“The catalyst sending the euro to its latest high against the dollar is the growing expectation that the Fed could trim interest rates by up to 50 basis points at its 18 September policy meeting,” said Global Insight economist Howard Archer.
(13 September 2007)
Contributor SP writes:
There are two related stories at the Beeb.
Yuan hits new high versus dollar
Readers should note that “The yuan is allowed to rise or fall by 0.5% each day, from a mid-point set by China’s central bank.” IE it is not absolutely fixed.
Dollar under continuing pressure
Which has a nice graph of the appreciation of the Euro vs the Dollar since 2000-1.
“The competitiveness of European economies is decided not on the currency markets but by their capacity for restructuring and innovation,” German finance minister Peer Steinbrueck added on Thursday.
Countdown to $100 oil (46) – What’s a dollar worth?
Jerome a Paris, Daily Kos
…what’s interesting today is that record lows against both the euro and against oil were reached. This suggests a weakness of the dollar as much as any particular strength of the other two.
- oil is strong because oil stocks are seen as low, and because OPEC’s decision to increase quotas somewhat was seen as more symbolic than anything else (they are increasing quotas to less than what actual production already is);
- the euro is getting stronger because of expectations of lower interest rates from the Fed at the next meeting, and because of fears of an economic slowdown in the US;
Most analysts suggest that the dollar is not overvalued against the euro (if anything, fundamentals would suggest the opposite). But as the dollar is not allowed (because of the mercantilist policies of Asian and oil exporters) to weaken against most other currencies, it can only go down against freely tradeable currencies, i.e. those of other Western currencies – Australia, Canada, the UK and the euro – which means overshooting against the “fair value” in these currencies. The expectation is that a weakened appetite for the dollar will lead to both lower rates against the above currencies (creating problems for exporters in these countries) and higher interest rates (to keep on attracting the $2.5bn per day the US needs to borrow to sustain its current lifestyle) – draining consumption and investment on both sides of the Atlantic.
Which brings us back to oil. In view of the expected slowdown (or worse) of the US economy, oil prices should be trending down. That they are not shows simply that we are in a new world, where oil prices are driven by exogenous (to us) factors – persistently strong demand growth in emerging and oil producing countries (China, Iran, Saudi Arabia, Russia and India), and constrained global supply (declining Mexico and North Sea, struggling Russia and Saudi Arabia). So despite the strong expectations of lower US and European demand, prices are still going up – or the dollar is going down – which is only compounding the problems, as imports get more expensive (generating more inflation), interest rates will need to go up (further weakening balance sheets and household finances).
And thus you see oil vs dollar index…
(12 September 2007)
Cold turkey for financial addiction
James Cumes, Asia Times
The time for financial detoxification seems to have come. Indeed, it seems to be long past due.
The addiction started with the junk-bond craze and the smart takeover merchants of the 1980s. Those junkies were on relatively soft drugs and they were fringe people – most of the serious investors and financial institutions saw them as market outlaws or barely legal cowboys. They were what I then called “adventurers, marauders and buccaneers”. Some crossed the line and were convicted on serious criminal charges.
In 1988, in How to Become a Millionaire, I asked, “How true is it that ‘what is happening in the financial markets today bears the same relationship to what happened in the “go-go years” of the 1960s as Caesar’s Palace bears to the local bingo game’?” Were we, I asked, “turning the financial markets into a huge casino”?
In the years that followed, we all should have gotten the answer. Soft drugs gave way to hard. Addiction spread. The drugs diversified; so did the addicts. Into the 1990s and dramatically more so into the 21st century, many of those in the top-drawer financial world became addicted. Many became more, more became most, and most in the past few years became all: the biggest and most respectable financial institutions, financiers, creative investors and even regulators joined in with a sense of benevolent enthusiasm that defied any remaining scaremongers.
When everyone in the house is crazy, only the sane seem like fools. So it was when the financial addiction spread everywhere. Then everyone who was not taking his daily dose of heroin or cocaine became the fringe-dweller, the oddball, the brake on progress, the party-pooper at the greatest no-cash-down, how-to-spend-it shindig that our planet has ever known. Debt piled on debt everywhere: in households, corporations, public finances and international deficits, in magnitudes that had never been even glimpsed in the most creative imaginations before.
But the universality of drug-taking does not mean that deadly drugs will not harm and cannot kill.
The deadly nature of the addiction was obscured by the extraordinary variety, complexity and obfuscatory nature of much of the so-called structured finance: credit derivatives, commercial paper, hedge funds, CDOs, CDSs, SIVs, ABCP and the rest. They all looked not only creative but also splendidly professional and expertly managed.
Dr James Cumes is the author of America’s Suicidal Statecraft, as well as other fiction and non-fiction works. Please click here for more information.
(Copyright 2007 James Cumes.)
(13 September 2007)
Contributor Steven Lesh writes:
This article is a little long but you ignore it at your peril. Dr. Cumes has an impressive set of credentials (Phd from the London School of Economics). He also has the age and success to care less if you are impressed. Check out his bio on the link at the end of page 4.
Here’s another little nugget:
“If the “notional value” of derivatives is something of the order of $600 trillion, we do not have to postulate that the central banks will absorb and “neutralize” all of this paper. Even if they were to absorb only 10% of the notional value, this would amount to about $60 trillion – more than the GNP of the entire world economy.”
