Tuesday January 18, 2005 - 11:30:11 GMT
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Black Swan Capital - www.blackswantrading.com
A dollar rationale emerging
“Democracy means government by the uneducated, while aristocracy means government by the badly educated.”
Yesterday morning, with the help of Morgan’s Stephen Roach, I laid out why there may be a shift in thinking on the dollar as a policy tool to “fix” the US current account deficit. Later in the day I read this from Mr. Stephen Jen, Morgan’s currency strategist:
“In my view, the Fed has a weak dollar preference. The US Treasury, on the other hand, appears to be less convinced that the US C/A deficit was a result of an overvalued USD, and less convinced that a dollar correction is the way to solve the US C/A problem.”
Mr. Jen believes “the Bush Administration is serious about implementing the policies that are needed to stabilise the dollar, including (1) keeping the proposed budget for FY2005 relatively tight, (2) pushing through Social Security reform, and (3) supporting the Fed’s intention to normalise rates.”
I’m on the same bandwagon. I think Mr. Snow and Co. have concluded: 1) US cannot export their way out of this problem, 2) a falling dollar will force the Fed to tighten more than otherwise, and 3), there is no need to chase global central bank funding away by jeopardizing the quality of their reserves if the expected benefits of a falling dollar are not accruing to the US.
The euro pieced below 130 in Asian trading; it’s looking a bit oversold on the daily charts, ditto for the pound and Aussie (overbought on $-Swiss).
As I said before, we are probably in the midst of stage 1 of conversion flow from extreme dollar bearish on the journey to extreme dollar bullish. The trip could be several months if the story plays out planned.
We now have the makings of a new rationale that could surprise: a serious effort by the US administration to “implement” a strong dollar policy on the belief that a falling dollar isn’t helping the deficit problem.
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