Monday, January 08, 2007


Strong Dollar A "Nice Slogan"

Reuters reports on currency trading. "The dollar fell from six-week highs against the euro on Monday amid speculation last week's rally on the back of robust U.S. employment data was overdone. The dollar also fell against the yen as dealers awaited a possible Bank of Japan rate rise next week. The U.S. currency also came under pressure earlier after news of an apparent gas leak that permeated large parts of Manhattan, prompting the evacuation of a number of buildings."

"The euro was last up 0.1 percent at $1.3021, up marginally from Friday's closing levels and off a fresh six-week low of $1.2973 earlier in the day, according to Reuters data."

"Against the yen, the dollar was down slightly at 118.68. The Swiss franc pared losses, leaving the dollar down 0.1 percent at 1.2361 francs, down from a session high of 1.2412, while sterling was up 0.4 percent at $1.9379. Against the Canadian dollar the U.S. dollar was up nearly 0.3 percent at C$1.1759."

From Bloomberg. "Gold in New York rose as some investors bet last week's 4.9 percent tumble in prices, the most in three months, was overdone. The seven-day relative strength index for gold futures on Jan. 5 reached 29, a signal that prices are poised to climb."

"'Gold's going to rebound,' said Nick Ruggiero, a trader at Eagle Futures Inc. in New York. 'There's going to be a correction in the metals because of the sell-off last week. We traded down to $603, so we need to bounce back.'"

"Gold futures for February delivery rose $2.50, or 0.4 percent, to $609.40 an ounce on the Comex division of the New York Mercantile Exchange. Prices earlier reached $611.10. The metal plunged $31.30 last week, the biggest percentage drop since September."

"'The price of gold will continue to go up and probably very substantially,' Marc Faber said. 'In the long run, it's very clear that central banks are basically increasing the supply of money and the supply of gold is obviously very limited.'"

"Faber, who predicted the U.S. stock market crash in 1987, said global assets are poised for a 'severe correction.'"

"Gold's gains may be limited after crude-oil prices fell, erasing earlier gains. 'Once crude gave way, support for gold and silver vanished,' said Tom Hartmann, a commodity broker. Gold gained 11 percent in the past 12 months, while oil has dropped 12 percent."

"Silver futures for March delivery rose 13 cents, or 1.1 percent, to $12.36 an ounce. The metal has dropped 4.5 percent this year after surging 46 percent in 2006."

From MarketWatch. "'While gold is hovering very much near critical support, there are no guarantees that the almost 3% fall recorded in the last session has been halted,' said Jon Nadler, analyst at bullion dealers 'Gold cannot be immune to a commodity bubble cave-in, at least in the initial phases thereof,' he said, adding that 'there is collateral damage to be incurred by gold simply by virtue of its proximity to other commodity metals.'"

"Crude futures lost nearly 8% last week, and the February contract fell under $56 Monday as warmer-than-usual weather continued in the Northeast for now and some market estimates called for the Energy Department to report on Wednesday a rise in petroleum supplies."

"'Eventually, we expect gold to de-couple from this 'guilt by association' syndrome and march ahead on its own strengths, most notably its monetary attributes,' said Nadler. 'Invariably, investors always return to the ever-dependable safe haven (be it from other assets and currencies, be it from geopolitics) characteristics of gold and positive trends are reestablished,' he said."

"Wachovia Corp. has said that most metals prices were likely to fall with economic growth in 2007. Indeed, 'growth is slowing all over the world,' said Wachovia Economist Jason Schenker, adding that he expects growth to slow further so prices for most metals 'face downside-price risks.'"

"Even so, gold prices are 'likely to rise moderately as foreign central banks increase their gold reserves and the [dollar] depreciates gradually against most major currencies,' he said."

The Business Times. "A misunderstanding by financial markets of the so-called 'strong dollar' mantra preached by US officials is helping keep the US currency overpriced and contributing to bloated external deficits, Harvard University economist Martin Feldstein said. Mr Feldstein outlined several factors that are holding the dollar at an overly high, and unsustainable, level."

"Repeated statements by US officials in support of a strong dollar 'are a nice slogan, but that's all it is', said Mr Feldstein, who is also head of the private National Bureau of Economic Research."

"Mr Feldstein said a correct interpretation is that 'we would like to have a strong US dollar at home (helped by low inflation rates) and a competitive dollar in the world.'"

"Financial markets are 'misled' if they think there would be government intervention or a shift in the Federal Reserve's monetary policy to protect the dollar's value, he said. 'The Treasury should not advocate a decline in the dollar, but it should not mislead the markets to think there is some hidden support there for the currency,' he said."

"Mr Feldstein said the sense that foreign investment will keep flowing to the United States because it is still the healthiest economy is another 'error of understanding.'"

"Most of the money now coming into the country is for debt purchases by foreign governments, not from equity investors attracted by fundamental strength in the US economy, as was more the case in the 1990s, he said."

"Speaking on the same panel, Michael Mussa, senior fellow at a leading think-tank, said the dollar will need to depreciate substantially, in real effective terms, probably by at least another 20 per cent over the next decade to help cut the US current account deficit in half."

"The dollar has fallen in the past five years by about 15 per cent on a trade-weighted basis against an index of major trading partners. Nonetheless, Mr Feldstein and others say it is still overvalued. The current account is the net flow of transactions, including goods, services and interest payments, between countries."

"The US deficit most recently was running at about US$900 billion a year, almost 7 per cent of US gross domestic product or roughly double the peak deficit of a share of GDP reached in the 1980s. Many economists regard that level as unsustainable, but the timing, trajectory and impact of any adjustment process remains subject to vigorous debate."

"Slashing the deficit with a weaker currency 'will not be completely smooth' but the risk of a disruptive dollar crash is not particularly great, Mr Mussa said."

'The Treasury should not advocate a decline in the dollar, but it should not mislead the markets to think there is some hidden support there for the currency,' he said."

That's cute. And politicians should tell the truth too.
Been reading lately debates about money supply. Anything that serves as a common medium of exchange is money, whether is is tokens, Federal Reserve Notes, coupons, checks, travelers checks, etc. Some of these increase the money supply for short durations, others for much longer. Some are covered money subsitutes, others are not.

As an example, a simple check is a covered money substitutes. They are a claim to deposits (in theory at least or it would be a bad check). They are usually extinguished fairly quickly once redeemed. Although it did increase the money supply for a short period, immediately upon redemption the supply is back to the original amount.

Moving to a loan for buying a home, this becomes a different story. This is especially true if there is zero money put down. The downpayment should cover the lender or borrower if forced to sell. In theory, a 20% downpayment would cover a drop in the asset price. Plus, after some time, payments over time would help to build equity in the home. Not the case if interest only with no downpayment.

Either way, loans created when not covered by money (fractional reserve banking) do increase the money supply through credit money. This is the dangerous part, and what leads to the rapid destruction of money, or at least credit money.

Our current financial system needs a continuous rate of increasing money stock, or there will be insufficient funds in the long run to pay off the principal and interest. Normally, this wouldn't be a problem unless the credit influx was extreme. Now, the debate is whether the recent credit influx was extreme or not.
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