Reply #2: daily dollar watch [View All]

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The dollar's dangerous path


http://www.japantimes.co.jp/cgi-bin/geted.pl5?ed20040202a1.htm


A stronger yen, or a weaker dollar, is a drag on Japan's export-led economic recovery. Trying to stem the tide, the government often steps into currency markets on a massive scale. Market players, however, worry that these dollar-buying, yen-selling interventions could be putting the Japanese and U.S. economies on a dangerous path: A falling dollar, should it continue, would open a Pandora's box on both sides, with dire implications for the world economy.


The theory goes something like this: America's "twin deficits" -- in the federal government budget and in the current-account international payments balance (mostly the trade deficit) -- continue to mushroom as President George W. Bush's administration pushes ahead with aggressive economic stimulus measures, such as huge tax cuts. As a result, investors and traders are coming around increasingly to the view that the greenback is in for a further fall.


The twin deficits are already ballooning to an all-time record: roughly $500 billion a year each. Add to this the low savings rate, or the small reserve of surplus domestic funds, and there emerges a precarious picture of the world's largest economy growing on the back of borrowed foreign money. A large- scale flight of capital may choke off growth.


For President Bush, who is seeking re-election in November, it is imperative to keep the U.S. economy moving forward. This makes it almost certain that the Bush administration will follow an expansionary fiscal and monetary policy. A weaker dollar seems to fit nicely into this policy because it helps expand U.S. exports while reducing the trade deficit. That explains why Washington, while talking of the "strong dollar," is winking at a weaker dollar.


In Europe, meanwhile, investors concerned about a sinking dollar are cutting back on their dollar assets -- a clear indication that they are beginning to have second thoughts about the U.S. currency. A case in point: Natural gas utilities in Russia and the European Union are moving to use the euro, not the dollar, to settle their transactions.


<snip>


For Japan, one result of the repeated dollar mop-up interventions is a sharp increase in the share of dollar assets in Tokyo's foreign-exchange reserves, which now exceed $600 billion. By contrast, China, an emerging economic power, has increased euro assets.


These dollar holdings will depreciate further if the currency weakens. Yet the government keeps propping up the dollar to prevent its precipitous fall. But the dollar's slide will persist as long as the twin deficits continue to bulge. If it drops below 100 yen per dollar, the nation's export-fueled growth will suffer. Manufacturers, now on the recovery track, may be able to hold on, but nonmanufacturers like builders and retailers -- who have been stuck in minus growth over the past several years -- would be hit harder. The protracted slump in service sectors is largely responsible for stubbornly high unemployment.


...more...


and


FOREX-Dollar near 3-year low vs yen; BOJ action suspected


http://www.reuters.com/financeArticle.jhtml?storyID=4258243&newsType=usDollarRpt&menuType=currencies


TOKYO, Feb 2 (Reuters) - The dollar was easier on Monday, dangling barely above last week's three-year lows against the yen amid speculation that the Group of Seven (G7) industrial countries may not agree on halting its broad-based decline.


But the greenback's fall was limited and many traders suspected the Bank of Japan, which spent a record 7.15 trillion yen ($67.2 billion) to prop up the dollar in January, was intervening again on Monday.


"The authorities have been intervening at a considerable pace this year, and it seems they are not going to let the dollar fall through 105 yen so easily," said Mitsuru Sahara, vice president of forex trading at UFJ Bank.


"So people will be cautious during Tokyo trading hours. But that does not mean the dollar won't come under pressure again in European and U.S. hours."


<snip>


Traders said the U.S. authorities appeared in no hurry to warn against the greenback's weakness, as the U.S. economy was benefitting from the cheaper dollar while U.S. shares have rallied recently, unscathed by the dwindling value of the dollar.


...more...


and a snippet from The Daily Reckoning newsletter:


One reason to trust Grant's forecast is that the dollar's
fundamental underpinnings continue to rot away day after day,
which means that the rationale for buying gold becomes stronger
buy the day. Notwithstanding the dollar's sharp rally last week,
the troubled U.S. currency still faces an extremely unforgiving
monetary climate. But gold -- like wild buckwheat ­ thrives in a
harsh environment. That's why we're still inclined to keep our
bets on the ancient currency, rather than the revitalized
greenback.


For one thing, the current account deficit grows wider by the day,
necessitating ever larger dollar purchases by foreign investors in
order to keep the dollar's value from falling. Consider that
holdings of U.S. debt by foreign central banks jumped to a new
record high last week. As of January 21, the Federal Reserve's
total holdings of Treasury and agency debt for foreign central
banks soared $13.86 billion to $1.108 trillion.

This should be a very interesting week - lots of variables and we'll have to see where they go.

Glad to see you have your internet back, Ozy! Was starting to get a bit worried about you.

Have a Great Day, Marketeer!