Opinion

The Great Debate

Dollar favorite in glue factory derby

By J Saft
May 6, 2010

The dollar may hang by the slender thread of the U.S. recovery, but this is probably enough to make it the major currency of choice.

It is not so much that the dollar is strong, but that the case for its major peers — the euro, pound and yen — is so weak.

The euro zone faces tremendous pressure; Greece may, just, have been rescued, but it, along with Portugal, Spain, Ireland and Italy are unleashing powerful deflationary forces making quantitative easing by the European Central Bank a real possibility. Further contagion within the euro zone is also a  strong possibility, meaning market risk will compound fundamental risk.

Even when the result of Britain’s election is clear, the path to a better fiscal picture is not, and when it comes, it will deal a blow to the economy.

Japan, as for so long, is not really going anywhere and doing so in an erratic fashion, again the implication being that the Bank of Japan will keep rates ultra-low.

The United States, then, is the pick of a bad bunch.

“The dollar is the best-looking horse in the glue derby” said Jan Randolph, director of sovereign risk at IHS Global Insight, speaking at a Euromoney foreign exchange conference on Tuesday.

U.S. manufacturing expanded at its fastest pace in nearly six years in April, though there is some question about how much is actual final demand and how much inventory restocking. Consumers too seem to be doing their thing again; they increased spending for the sixth straight month in April, though they did it courtesy of government transfers and a declining savings rate.

While there are questions about the sustainability of the U.S. recovery, it is also true theFederal Reserve is a lot more likely than any of its big-time peers to start raising rates any time soon, providing further support for the dollar.

In fact, if anything, what is striking is what unanimity there seems to be about currencies among investors and strategists. Everyone, seemingly, sees the dollar getting stronger in the coming year, though many expect there to be considerably more volatility than in the past 12 months. This unanimity could mean that an unexpected event might see a strong reversal.

And really, if you stop to consider the major alternatives, it is easy to see why the dollar is so popular. Thus far this year it has gained more than 10 percent against the euro, 6 percent against the pound and 5 percent versus the yen.

Comments
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It is not so much that the dollar is strong, but that the case for its major peers — the euro, pound and yen — is so weak.
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Doublespeak at its finest. That’s like saying to an Olympian, “It’s not that you deserved a Gold Medal, it’s just that your competition sucked worse than you did.”

Posted by GLK | Report as abusive
 

Let’s compare economics, the USA has a 85% service industry driven economy. The Europeans have a 60%+ production industry driven economy. The European exports have been hurt by an “overvalued” Euro, but have not been able to do anything about that – “because the USA is going down in debt-flames and the Euro is so good”.
THANK YOU Mr and Mrs Hedgefund to take care of something the Europeans could not have done by any means: “Make the Euro a competitive export currency again!” Now Euro-priced products are competitive, factories can produce and sell, can hire (unemployed) again, profits will rise, tax-income for the EU will increase, and slowly but steadily the merits of a production-industry driven economy will come to the fore, thus “working themselves out of a bind”. Let the Euro go to USD 1,10

Posted by Duhhh101 | Report as abusive
 

@Duhhh101
69% of German economy is services
76% of US economy is services
77% of France economy is services

Posted by PwlM | Report as abusive
 

Thanks for those statistics PwIM! Still, all of a sudden we’re underbidding by a margin, gearing up for more sales, looking at contacting the employment office, there’s a spring in the step of our sales-division staff! The last 2 years have been terrible, and now the sun is shining again.

Posted by Duhhh101 | Report as abusive
 

The American people will not pay for major items and “homes” they “buy”..they’ll take stuff home and stiff the lenders. The fabled Protestant ethic and desire to “pay” for anything is dead.I do see an uptick in home improvement and preparedness spending where I live and true efforts to harden the target. There is a general feeling that things are going off the cliff and the “government” at all levels is not in their corner and is not “fixable”, that banks and government and chain stores are just predators. And there is a simmering anger. They know they have been “gamed” by the banks and the “government”. They know that dollar “money” and loans are necessary evils for now. The only strength the fiat dollar has is the people’s faith in it and the institutions behind it..don’t count on this faith continuing for long..There is a new wind blowing..it’ll be rough on things as they have been including the fiat dollar..the banksters and the elected representatives who gave them cover overreached..a “restructuring” is in the wind..yes, this includes PIMCO debt and the works..

Posted by gramps | Report as abusive
 

Well balanced opinion James Saft,

“A dollar is a dollar” that was true with no Euro
comparison. Just print money, dollars and create a
dynamic sub-prime environment to feed investments
on borrowed money. This is over now, so what’s up
how to survive?

Two strategies:
Europe
remembers the new debt limit of 3% GDP
France today stopped all increasing expenses for
next 3 years. This way the Greece crisis makes
corrections versus balance sheet in order for
Europe 2012.

U.S.
counting on technology leadership Cleantech, smartgrid,
Electric vehicles…on this future cash cows can print
more Dollars, will also work out the dynamic approach.

Conclusion: Let Europe and U.S. turn again the wheel of
the economy “Cleantech” it will work, a hybrid trans-
Atlantic approach has more success chances, than
overpopulated China-India consumer communism
running into climate change trouble with not
yet having a global responsibility view.

Great comments and quality debate
worth to continue…..

Posted by Solarlife | Report as abusive
 

In fairness to the dollar, in spite of all the Wall Street machinations that have rendered it otherwise null and void, it’s still the international currency of choice for slave traders, hijackers, gun and drug runners, whores, mercenaries and environmental saboteurs: growth industries all.

Posted by HBC | Report as abusive
 

I’m amazed how our economy is holding up the way it is considering nearly 108T$ debt liability ( as per http://www.usdebtclock.org ). It’s like a family with a debt of $108, earns $2 per year (in tax receipts) and spends over $3 per year (in budget expenses). How will this family sustain?

Posted by Mott | Report as abusive
 

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