Dollar back above 80 Euro cents

The Dollar recovered some value starting Thursday, passing 0.80 €. Today it is approaching the 0.81 € mark. There are a number of reasons for this. The Euro had come within almost 1 US cent of the "pain threshold" of $1.30 (roughly 0.77 €), and European goverments were making intervention noises. Some good US economic news also helped, including solid corporate earnings, inventory declines, and consumer confidence. The bank of Japan also intervened to prop up the Dollar vs. the Yen.

In the short-run at least, this stabilizes the currency situation, and hence the ability of the US to sell debt at low interest rates.

The market is obviously showing volatility, so I'll be following this closely.

•  The Dollar

  BUT, see the ROUNDTABLE in today's Barron's.

  I'm betting on a further fall in the dollar.  Oil continues UP,  commodities are UP.  This has to indicate some kind of inflation, somewhere.  I think the US ends up (is?) competing with China (and a resurgent Asia) for resources.

  And, since when did this Admin give a damn about Euro pain?

  The current choice is paying for all this by printing money,  and hoping the economy reflates.  But, the Roundtable folks are pretty skeptical about last 1/2.  So am I.

  My thought:  current strength in dollar is dead cat bounce.  I need a reason why it can be sustained ...?

  by WalterB on Mon Jan 19, 2004 at 11:30:11 AM PDT

  •  I agree, sort of

    The Dollar fundamentals are awful. But the Euro fundamentals aren't so hot and neither are the Yen's. Those economies are underperforming and have a growing population distribution problem (many old people, few young people), so France and Germany are running rather large deficits.

    I think the key here is China, the ME, and other regions, where the Dollar has lost favor for market, political and practical reasons. US equities are no longer valued as they were in the dot-com days, for example. The bursting bubble was painful and the subsequent scandals a lesson.

    But the Europeans have their own scandals (Parmalat, Vivendi) and burst bubbles (British Telecom, France Telecom, and others).

    Ultimately, though, their advantage is that they are not running a chronic negative current account balance. This is what, in the end, will prove the dollar's undoing if it is not corrected.

    by M Aurelius on Mon Jan 19, 2004 at 01:34:37 PM PDT

    •  I had to dig through the diaries...

      To find this again.  Given this administration's propensity to over spend and the Republican Congress's willingness to belly up to the pork-barrel trough in a way that is making Democrats blush, what can we do in order to stop the dollar's slide?  And will we start seriously feeling the affect of this by this summer?  Part of me says yes, while the more cynical side feels that Dubya is going to dodge the bullet until 2005/2006.  Either way, it is going to be a huge mess for someone to clean up.

      O'Neil's book is an insight into what we have been saying in the economic threads on this blog.  Prancer is by no means implementing policy, just doing what is politically expeediant or what he can politically get away with.  The CBS/NYT contains a little cherry about how most Americans do not feel the benifit of the tax cut.  I think they were willing to go along with it, even if it does mean giving the weathly more, as long it means more jobs.  The December job report blew that out of the water.  So I hold out no hope that the dollar will be corrected...

      by RichM on Mon Jan 19, 2004 at 03:17:25 PM PDT

      •  NOTE THE 60%

        or so, who say they want the tax cut REPEALED, in both NYT/CBS and WSJ/Harris last week.

        There's some interesting stuff in those polls for the campaigns.
        

        by WalterB on Mon Jan 19, 2004 at 03:35:23 PM PDT

•  Fiddling in Iowa While the US Burns?

  It seems we have a private discussion.

  As you say, "... the key here is China ..." and, with respect to both Asia and Europe, "... their advantage is ... not running a chronic negative current account balance."

  The US has had an increasing trade deficit every year since 1975.  The 1975 deficit occurred when foreigners stopped buying our machine tools.  That fact is important,  because it reflects the US trade strategy:  sell advanced products or knowledge-ware that (supposedly) cannot be had elsewhere.

  The problem with the strategy is its assumption.  In fact, those dummies elsewhere learn fast and can make almost anything we do.  Lately, even I have been surprised how capable Libyans are in making nuclear stuff.  The Russian and Chinese grip on rocketry and space programs will not be relieved any time soon,  The Chinese, especially, don't need anything we make for their programs (despite the howling over the sale of guidance systems).  The American rationalization has been either, no good or doesn't exist because 'not made here.'

  So, I don't think the trade balance is going to go away, ever.  Like the Dutch and British of an earlier day, we are relying on our presence everywhere to enforce tribute,  collected as the trade imbalance.  The Japanese, for example, have gone along with this,  hoping to cash in in sooner or later;  or they have used Treasuries and other US equities as a bank.  The Chinese are financing us, too, since they need our market to maintain internal growth until China has sufficient demand at home.  So, actually, we're either financing Japanese retirements or Chinese factories (jobs).

  I think we're paying for the trade deficit with refi's, credit and what-have-you. Someday, people will just run of money.  I don't know when that is, or what happens then.  It could take down Japan and China if they don't disconnect before the fall.

  I hate to sound so pessimistic, or apocalyptic.  But, I just don't see how we get out of it.  Clinton's budget surplus was the last chance.  With the Boomers retiring - STARTING IN A YEAR OR TWO - it's all over.

  We're like the people who travel around on no money and no gas,  hoping, hoping they'll get to the next gas station, and beg a few pennies,  before they run out.  I used to do that when I was in college.  Trouble is, for example, if you venture into NEVADA or lots of places in the great southwest,  even West Texas, you just can't get there from here.
  

  by WalterB on Mon Jan 19, 2004 at 03:32:01 PM PDT

  •  Circle back around...

    I mentioned the economic consequenses for national security in a diary thread here.  Basically, how long until either the Chinese either a) start dictating our national defense budget or b) start dumping our bonds on the open market?  We already have seen Prancer warning Taiwan not to vote for independence.  I don't think it will happen for awhile, because of our deadly embrace, but eventually, the economics of continuing to buy our debt will look bad.  We are in a global economy and these financial decisions will play out faster than in the past.

    I have this argument a lot with Republican friends.  They are in total denial.  They say things like, "Reagan proved that deficites don't matter."  Well, if that's the case, then why collect taxes at all?  Why not just borrow all of our budget?  Also, when Reagan was president, those bonds where mostly bought by American investment firms and some European central banks.  Now they are being bought up by a political and economic rival.  Would the Cold War have ended the way it did if the USSR bought all of Reagan's debt?  I doubt it.  Also, Reagan benifited from everyone fearing the Soviet Union.  Today, everyone fears us.

    by RichM on Mon Jan 19, 2004 at 05:14:43 PM PDT

    •  Everything Connects to Everything

      I read your other entry about defense.

      I believe, probably with you, that military power cannot be disconnected from economic strength.  It is the "national generalization" of an equation that applies to people:  money = power = sex.  These things are interchangeable.

      That is why I referred to collection of tribute.

      Last year, or maybe in 2002, I wrote in a WSJ Forum on Korea that eventually TAIWAN would be on the block in exchange for Chinese help on Korea.  Of course, the conservatives in that rag didn't get it, and still don't.  Thus, the Bush admonition you noted against having a referendum.  (Who says the US has no colonies?  And,  whatever happened to bring it on?)

      I want to write a piece on the economy; specifically, on getting people to understand what is at stake.  I think they're self-concerned but don't see or feel the global consequences.

      Why is economics hard?

      by WalterB on Mon Jan 19, 2004 at 06:01:37 PM PDT

      •  Excellent

        I believe, probably with you, that military power cannot be disconnected from economic strength.  It is all related.  Economics, politics and foreign policy.  We are no longer isolated when I can make a transaction in China over the internet in an instant.  What happens in Iraq affects what happens in Paris and affects what happens in London, Moscow, Bejing, Tokyo, Washington and Peoria.  The interconnection is confusing, but economics really isn't.  It just isn't as 'sexy' as war, or even getting an illicit BJ in the Oval Office.

        Bottom line is, Dubya is erroding confidence in the US and therefore its economy by invading foriegn countries without good intelligence, spending like a drunken sailor and allow the US to continue to slip into a service economy where we basically produce nothing but military hardware.  It is unsustainable, IMHO.  And it actually keeps me awake at night.  I don't see any way out except for total fiscal meltdown.

        by RichM on Mon Jan 19, 2004 at 07:14:12 PM PDT