Wednesday March 2, 2005 - 11:24:28 GMT
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Black Swan Capital - www.blackswantrading.com
Dollar rally" Growth and yield
“It is too rash, too unadvised, too sudden.”
William Shakespeare, Romeo and Juliet
Well, Australia proved this morning that it’s not all about interest rates—growth counts.
We have the euro zone heading south (IMF upbeat on U .S., China growth, gloomy on Euro), Canada still an open question (Sagging Canadian exports prompt rate-cut talk), Japan looking weak, despite recent numbers, and the US chugging along—someway, somehow. And today, the dollar seems to be reflecting that reality.
Here is my simple take on the rising concern about Asian central banks reportedly ready to reallocate out of the dollar en masse:
Let’s just say for a moment that you are a policy maker in one of the key Asian countries that does a lot of exporting. And as you survey the landscape you notice a decline in demand from many of your smaller customers. You also notice that your key customer—the US—is becoming an increasing share of everything shipped.
A) Do you decide to make it more difficult for your key customer to buy your product by making it more expensive i.e. by allocating some your countries foreign exchange into other less-important customers’ currencies (euro, yen, Australian $)?
B) Do you decide that it makes sense to keep your largest and increasingly important customer happy by making your selling terms agreeable?
I’m going with B!
So let’s say we take that rationale for dollar weakness off the table—at least for now. What do we have? A US economy that looks downright prosperous compared to its key competitors. A Fed Chairman that looks increasingly serious about punch bowl removal. Shazam!! The US dollar has both growth and yield going for it at the moment.
Of course we know what is lingering in the background—those Double D’s of Doom i.e. the current account and the federal budget deficit. As big and as bad as those Double D’s are—one has to believe that rationale is now well beyond stale i.e. in the price.
And low and behold, there are actually some people who are brave enough to write an article favorable to the US-- March/April edition of Foreign Affairs magazine, “The Overstretch Myth”, by David Levey and Stuart Brown. I haven’t seen much play from this article within the currency crowd, but then again, most in the currency crowd seem to be rooting for a total collapse of the dollar and some type of hegemony by China or Europe or anyone else. Here is the summary:
“The United States' current account deficit and foreign debt are not dire threats to its global position, as would-be Cassandras warn. U.S. power is firmly grounded on economic superiority and financial stability that will not end soon.”
I know many are lapsing into an apoplectic fit of rage after reading that paragraph. But, I think it’s important to consider that maybe, just maybe the dollar isn’t dead after all.
Monthly chart US$ Index
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