Wednesday, December 27, 2006

 

US Dollar Down On Reserve Move

MarketWatch reports on the US dollar. "The dollar fell against other major currencies Wednesday, after the United Arab Emirates said it's planning to diversify its foreign-exchange reserves away from the U.S. currency. But the greenback trimmed some of its losses after a U.S. government report showed sales of new homes rose more than forecast last month."

"'The better-than-expected new-home sales report will add some weight to notions that the housing market is stabilizing,' said Brian Dolan, director of research at Forex.com. However, 'with home builders offering large discounts and incentives to move unsold inventory, it's difficult to say with any conviction that the housing market has turned the corner.'"

"Late in New York, the dollar was quoted at 118.81 yen, compared with 119.11 yen late Tuesday. The euro changed hands at $1.3115, compared with $1.3098. The British pound traded at $1.9561, compared with $1.9538. The dollar changed hands at 1.2259 Swiss francs, compared with 1.2231 francs."

"Sultan Bin Nasser al-Suwaidi, UAE's central bank governor, said the bank plans to raise the share of euro holdings in its reserves to 10% from 2% over the next six to nine months. The bank also said it has started to do so in a "limited way" and will buy euros on pullbacks and sell dollars on periodic highs. UAE's reserves stand at about $25 billion."

"'This approach to reserve accumulation is consistent with that of many central banks planning to diversify their reserves without triggering rapid moves in the value of the dollar and the euro,' said Ashraf Laidi, chief foreign-exchange analyst at CMC Markets in New York."

"Currency analysts at Brown Brothers Harriman, noted that while some observers cited the UAE news as a dollar negative, 'from a different angle, it illustrates how benign the developments really are,' they said, adding that the amount of reserves involved is roughly only $2 billion. 'UAE plans on holding roughly 90% of its reserves in dollars, well above the average above the U.S. dollar share in the world economy or financial assets,' they wrote."

"A number of countries, including Sweden, Qatar, Italy and Russia, have announced plans this year to diversify their reserves away from dollars. The Russian, Swiss and New Zealand central banks also said recently that they were increasing their holdings of yen."

"The yen found some support after Japan's Jiji news agency reported that the Bank of Japan will likely discuss a proposal to raise its key overnight call rate target by 0.25 percentage point to 0.5% at its next policy meeting in January. 'The story underpinned yen strength for the session despite retail sales which missed expectations and continued to signal broadly weak consumption in Japan,' said Terri Belkas, currency analyst at FXCM."

"'Yen's gains could be temporary as the BoJ is more likely to hold off until later in the first quarter of 2007 before tightening monetary policy for the first time since July,' Belkas said."

"A weaker dollar and concerns about Iran's nuclear strategy helped gold futures to make some headway, as the market got back into full gear with the return of European traders after their extended Christmas holiday."

"Gold for February delivery closed up $3.40 at $630.30 an ounce, adding to gains made on Tuesday when the contract added nearly $5 an ounce on the New York Mercantile Exchange."

"'Conditions are set to remain thin over the next few days, which could lead to some interesting movements, particularly if the war of words between Iran and the west intensifies,' said James Moore, analyst at TheBullionDesk.com in London. 'Good support continues to be found ahead of $620.'"

"However, Moore noted that from a technical standpoint, gold remains vulnerable to testing its 100-day moving average at $611.75 an ounce."

"Other metals traded mixed. Silver futures rose 20 cents to $12.925 an ounce. But front-month platinum and palladium contracts closed lower."

Comments:
Ben,
Ot for this article, but more relevant for this blog than the housing.

How much bad debt loss do you we have coming down the pipe?

Who will eat all this bad debt expense?

How will all this coming abolishment of money (US$ and debt) play out with the overall US money supply?

Where I am coming from is that (from memory) we have like 2 trillion in debt resetting next year and they exstimate that 1/4 or those loans will default. If the lenders can recoup 1/2 of that there will be $250 billion in US$ and debt that will disappear.

In the last 6 years the total value of RE in US went from like $5trillion to $12trillion (from memory). I have no trouble seeing half of that $7trillion gain dissapear. In total this would leat to around $4trillion in bad debt and $3trillion in capital loses.

The more I think about this loss (mostly foreign?) the more optimistic I become about the US ability to avoid major financial meltdown (depression and high inflation). The other markets in the world may now be able to take up US consumption slack, but can they do so effectively in the face of losses (is $3trillion a lot?) in this magnitude?

I am beginning to believe that this credit/dollar abolishment (if enought default) might strengthen the American balance sheet enough to (screw our creditors) mitigate some of the recessionary and inflationary pressures facing the US. My thinking basically sees maximum US bennefit (long run) coming from maximum (theft) foreclosures.

It is like the stories of those destroying their credit for purchase kickbacks of $200k. From a logical standpoint it makes perfect sense to me that someone with no money would destroy their credit for this kind of cash. I know that when I was in my 20's I would have destroyed my credit for $50k, that would have been enough to put me in business and free me from needing banks anymore. If I was in my 20's-30's without kids or assets I would be buying every home I could for a kickback of $100k. Hell $300K is enough for a single (VERY FRUGAL) person to not work again. You could have no car, not eat out much, no cable, cheaper food, etc... If one could do without the badges of consumer foolishness I see no problem (moral or otherwise) screwing these lenders for this kind of juice. How many across America are doing just this (knowing it or not)?

Since the US Savings rate is nill all this debt has to be flowing into foreign coffers, the more we burn them the better for us?
 
Rich,
If we were not reliant on foreign purchases of our debt, your scenario would be plausible. However, who is going to lend us money (at other than very high rates) after such a situation? We will have essentially defaulted.
 
Kirk,
I feel that future US fiscal discipline is a given, no matter if it us doing the belt tightening voluntarily (higher taxes) of foreigners charging much higher interest. No matter what we do there will be a recconing and our account balances will brought to a point of fiscal workability.

Pointing out the fact that we are in an untenable debtor situation just supports my thesis that much of the debt (ours) will cease to be when the defaults come. Just because we NEED the foreigners to loan us money does not mean it will happen.

This credit tightening will be a blessing in disguise for us, it will limit the huge missallocation of capital into economic dry holes.
 
Rich,

Banks & pension funds are HUGE holders of MBS. Despite being able to package and sell off their loans, banks still have record exposure to residential real estate (62%).

Yes, a national chapter 7 would seem to be in order, but regardless of what happens a depression is inevitable.
 
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