I wrote on 7th Decemebr uncanilly predicting short term upturn in dollar cycle ( Link: https://investmentacademy.wordpress.com/2009/12/07/alert-imminent-decline-in-market-with-rally-in-dollar/).
Arguments were simple. Dollar carry trade has reached to very high level of $560 bn in very short less than a year.
Technically Dollar was in oversold territory for a long period and recovery in US economy would also play a role.
But, I chose to write again on 17th Dec giving more details on the issue. Comparing all Dollar Index economies namely UK, Europe, Japan, Switzerland, Australia instead of Sweden and Canada with US.
Conclusion was, in short term it seems Euro Zone, UK, Switzerland and Japan are in greater difficulties than US.
News flow since than has confirmed it.
Greece, Poland, Ireland and Hungary are still in trouble and are reaching to a critical stage of crisis. Which has pushed down Euro against Dollar and yen.
Japan has opened flood gates of liquidity to stem the rise of yen against dollar after yen made historical high aginst dollar.
Dollar index may reach upto 81, there is a stiff resistance at that level.
But, this is about a short term dollar cycle. What about long term?
Make no mistake, every country will devalue its currency. That is the only politically and economically viable option in crisis when debts are high, jobs are lost and Government is facing anguish and agony of voters.
I wrote in my 2010 forecasts ( Link: https://investmentacademy.wordpress.com/2010/01/07/2010-new-year-forecasts/), no country can afford to have strong currency. And, every country would put pressure on devaluing currency against each other.
Why US will also resort to devalue the $?
Becasue US has little benefits of strong currency.
McKinsey’s latest report shows it.
” This may seem a no-brainer given the enduring assumption that, as a former French finance minister charged in the 1960s, the United States enjoys an “exorbitant privilege” from the dollar’s reserve currency status. But the surprising result of MGI’s analysis is that the United States, in fact, enjoys hardly any net benefit at all. In 2007 and 2008, MGI estimates, the net financial benefit to the United States was between about $40 billion and $70 billion—or 0.3 percent to 0.5 percent of U.S. gross domestic product. And in the year to June 2009, when the dollar appreciated by about 10 percent due to its safe-haven role, the cost-benefit turned even less positive: We estimate a range between a net benefit of $25 billion and a net cost of $5 billion.
There are two main benefits to the United States as issuer of the main reserve currency. First is interest from seigniorage—the profit made on issuing additional currency to nonresidents who hold U.S. notes and coins—estimated at $10 billion a year. Second is the fact that the United States is able to raise capital more cheaply because of very large purchases of U.S. Treasury securities by foreign governments and government agencies. We estimate that these purchases have reduced the U.S. borrowing rate by 50 to 60 basis points over the past few years and are worth about $90 billion to the United States. The large downside to the United States is that the reserve currency is a magnet for the world’s official reserves and liquid assets, and that these flows mean that the dollar exchange rate is higher than it would be without reserve currency status by 5 percent to 10 percent. This harms the competitiveness of U.S. exporters and companies competing with imports.”
In short, strong $ is not top prority for US.
Instead, I woud guess shortly it can become last priority.
Why $ will be last priority for US?
Obama adressed ” The state of the Union” on 29th and if any one read the entire speech, the priorities on agenda from 1st to 100 were jobs, jobs, jobs……………………..jobs only.
Hereunder, I have presented some excerpts from his speech on diverse topics.
Obama said he is commited to craeate more jobs( could be political statement), he cracked down on outsourcing to cut the tax brakes extended to these companies but last on Export is of vital importance
He said goal is to double the exports in next 5 years and want US industries to compete with emerging countries to fetch more projects and thus more jobs in US.
But I realize that for every success story, there are other stories, of men and women who wake up with the anguish of not knowing where their next paycheck will come from; who send out resumes week after week and hear nothing in response. That is why jobs must be our number one focus in 2010, and that is why I am calling for a new jobs bill tonight.
We should put more Americans to work building clean energy facilities, and give rebates to Americans who make their homes more energy efficient, which supports clean energy jobs. And to encourage these and other businesses to stay within our borders, it’s time to finally slash the tax breaks for companies that ship our jobs overseas and give those tax breaks to companies that create jobs in the United States of America.
Third, we need to export more of our goods. Because the more products we make and sell to other countries, the more jobs we support right here in America. So tonight, we set a new goal: We will double our exports over the next five years, an increase that will support two million jobs in America. To help meet this goal, we’re launching a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security. We have to seek new markets aggressively, just as our competitors are. If America sits on the sidelines while other nations sign trade deals, we will lose the chance to create jobs on our shores. But realizing those benefits also means enforcing those agreements so our trading partners play by the rules
I believe, this is veyr clear message. To create more jobs, more businesses, manfacturing and service industries should start business in USA. But, problem is strong currency. And, that is why I havd no doubt, when benefits are little of being reserve currency of the world and at home when faced with crisis, what matters is politically and economically viable option and for that if they have to sacrifice some valuation, they won’t be bothered.
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