http://www.financialsense.com/editorials/odonnell/2004/0302.htmlsnip>
The U.S. continues to run massive monthly trade deficits – over $40 billion a month – and dollars continue to pile up in the vaults of goods exporters like China and Japan, services exporters like India, petroleum exporters like Saudi Arabia, and, to a much lesser extent, European exporters.
This dollar surplus puts tremendous downward pressure on the greenback. In the short run, this is supposed to boost our exports, make imports more expensive, and bring our trade deficit back into balance. So far this hasn’t happened, in large part because the massive fiscal stimulus of the U.S. coupled with the easy money policy of the Fed continues to make it easy for U.S. consumers to gorge on foreign goods.
In the long run, a weakening dollar is inflationary as it raises the costs of imports – and its just one reason why gasoline is above two bucks now here in the Golden State and why it costs $50 bucks to fill up an SUV. Ultimately, this weak dollar stalls consumption by reducing purchasing power and the economy must stall with it.
From this discourse, you should see why, then, that a dollar that continues to weaken and both trade and budget deficits that continue to accumulate are nothing more – or less!!! – than ticking economic time bombs that may well blow up after (and perhaps even before) the November presidential elections.
Within this big picture context, one shouldn’t be confused by the recent mini-rallies of the dollar, at least with respect to the Europe. As the article below from UPI explains, these are merely short run movements driven by speculation as to whether or not the European Central Bank will lower interest rates to counter the negative effects of the weak dollar on the strength of the European recovery.
NOTE ALSO that inter-twined in this story is some news about the imposition of tariffs by the EU – that’s just what the world needs now, a trade war.
snip>
As a final comment on the weakening dollar, there is no analog in Asia to an EU interest rate cut to bolster the dollar. In fact, the only way the dollar is likely to go relative to Asian currencies is DOWN. This is because there is tremendous pressure on the Chinese yuan to either float or be pegged upward from the dollar.
Ultimately, all of these relationships between the Euro and the Dollar and the Yen and the Yuan signal an ongoing shift of the international economic center to Asia. That bodes ill for the U.S. stock market over the buy and hold long term.
snip>
EXCERPTS FROM UPI STORY
…The euro rose yet again Friday closing at almost $1.25, up from just over $1.24 Thursday. The euro rose by 15 percent in the last 12 months against the U.S. dollar, and more than 50 percent against the dollar from its all-time low of 82 cents about four years ago. The euro reached an all-time high Feb. 18, topping $1.29.
During a speech Thursday at the Chicago Council on Foreign Relations, German Chancellor Schroeder said that the weak dollar is dangerous for world trade.
"Major imbalances in the global economy and fluctuations in exchange rates give us cause for serious concerns," he said.
"Europe's current account is virtually balanced. Savings and capital investments remain largely in balance in our countries. Against this backdrop, further significant shifts in the exchange rates that would put the eurozone at a disadvantage do not make sense economically. Rather, they would do harm," he said.
While a weak dollar helps to drive U.S. exports and narrow the trade deficit, it hurts export-driven European economies such as Germany, which last year had $750 billion in exports. Most analysts agree that the ECB will probably decide to cut interest rates rather than buy dollars. And Bush can hardly be expected to ask Greenspan to raise interest rates to strengthen the dollar just before the election.
As an added measure to slow the sale of U.S. goods into the EU, the EU confirmed Friday that it would impose tariffs on U.S. goods starting March 1. Schroeder would seem to be at odds with this decision, having said Thursday in Chicago, "The answer cannot be that we rely on protectionism or attempt to shut ourselves off from the global markets when they have unpleasant consequences for us."
snip>
While U.S. exporters might not take the news so hard with the dollar weak as it is, the tariffs would become a major problem if the dollar gained strength, driving up the cost of U.S. exports.
http://www.smartmoney.com/bn/ON/index.cfm?story=ON-20040303-000457-0913Dollar Off of Highs
NEW YORK -- The dollar was pulling back Wednesday in New York from fresh multimonth highs hit overnight against most major currencies, as the market consolidates after recent strong gains.
In morning trading, the euro was at $1.2164, below $1.2216 late Tuesday in New York. The dollar was also at 110.17 yen, up a bit from 110.10, and was also higher against the Swiss franc at 1.2995 versus 1.2947. Sterling was at $1.8321, down from $1.8395.
The dollar's rally, which began Tuesday with the euro's fall through the key $1.2350 level, ran out of steam when the single currency found support around a three-month low of $1.2108 just ahead of the New York session.
Tommy Molloy, trader at Bank Leumi in New York, said the dollar's move appears to be a bit overextended, so "the crazy volatility we've seen the last few days should be reduced."
However, investors are unlikely to reestablish any of the short-dollar positions -- which essentially bet on a weaker dollar -- ahead of key events over the next couple of days.
Besides technicals, the market has become increasingly focused on interest-rate differentials. Low U.S. rates have made it difficult for the U.S. to attract enough foreign investment to finance the current account deficit, and hopes that the Federal Reserve would start raising rates later this year have helped the dollar recover in recent weeks.
snip>
There are also some remaining jitters about the European Central Bank's decision on interest rates Thursday, though the central bank is widely expected to keep rates on hold.
"Until we get some clarity on whether the ECB is going to cut rates or on the nonfarm payrolls, we're looking for the market to consolidate within the new ranges," Mr. Molloy said.
snip>
The Bank of Japan, acting on behalf of Japan's Finance Ministry, is suspected of continuing to provide covert support to the dollar around the 110 yen level.
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