Monday June 6, 2005 - 10:50:25 GMT
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Black Swan Capital - www.blackswantrading.com
Dollar correction on rates or seniment...
“The strong dollar attracted imports, which helped to satisfy excess demand and to keep down the price level. A self-reinforcing process was set into motion in which a strong economy, strong currency, a large budget deficit, and a large trade deficit mutually reinforced each other to produce non-inflationary growth.”
George Soros, Alchemy of Finance
The problem with economics is that often the so-called answers only create more questions:
The Economist took a shot at cracking the conundrum in its recent issue, outlining a study by Stephen King, not the scary one, the chief economist one at HSBC [our emphasis]:
“But why, when America's economic growth still looks strong, its fiscal deficit supposes continued high borrowing, its trade deficit implies an eventual weakening of the dollar, and high oil prices suggest inflationary pressure—all of which normally push up bond yields? Globalisation, demography, cowed corporate executives and god-like central bankers all offer possible reasons why this time is different.”
We realize the words “it’s different this time” is usually a big red flag—but we think much of what Mr. King and The Economist say makes good sense. The problem lies in the premise.
A) “…trade deficit implies an eventual weakening of the dollar” – Why? Could it be that policy makers now realize the manufacturing component of US exports is relatively low compared to services? And if so, could it be that policymakers realize a weaker dollar in this NEW environment would only lead to higher deficits?
B) “… high oil prices suggest inflationary pressure” – Why? Don’t we already know that the consumer defers spending on other goods in order to fill his car’s gas tank? If so, isn’t total spending in the economy the same, simply shifted to producers of gasoline? So isn’t the same amount of money still chasing the same amount of goods?
Is there a point here? If so, it is this: The US dollar may not get the boost that was expected from a soaring yield differential—though the jury is still out. But the elixir of low long-term bond yields and a Fed that doesn’t go too far might not be too bad for the US economy over the intermediate term.
We expect a dollar correction—it could be multi-week affair needed to shake off some of the bullish sentiment piling up in the buck.
Chart: $ Index Jun '05
The reasons given for the pull-back in the dollar will probably be interest rates—and the pending Fed pause. But keep in mind, over the intermediate-term it’s more than just rates. It’s the strength of the economy and global money flow. And based on the battered global economic landscape and what we perceive as a slowing China—the US still wins first price for the least ugly among the contestants.
Black Swan Capital
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