Saving the economy, but how about the Dollar?
Written by A Forex View From Afar on Tuesday, January 22, 2008Back to www.thelfb.com
It's pretty clear, Mr. Bush, Mr. Bernanke, the famous Plunge Protection Team; everyone is doing what they can to save the economy, but it looks like they are forgetting to save the Dollar.
The anticipated Rate cuts and Tax cuts are the hottest topic around, taking the Forex trader's eye from other points of view. Rate cuts aren't just about announcing them and then the speech after, Rates cuts are actually flooding markets artery with (cheap) money. Tax cuts are mostly the same thing, flooding consumers with money that otherwise the Government would take.
So the consumers now having more money in their pockets will start spending, unsold houses will find buyers, Banks won't have so many write-downs, everything will be fine. The same things Fed thought in 2001/2.
Money flowing around will make consumer spend again. Oh yeah, when did you look last time at the US trade balance? 1-2 weeks ago? Then maybe look again, because now it's much bigger and with consumers increase their spending, the Trade Balance will grow. We really don't see entire Industries shredded by outsourcing for decades, coming home so consumers can buy native products, as Mr. Bernanke has stated.
You know the strong Euro that some Traders say will destroy EU exports to US?...Well the Trade Balance between EU and US got smaller in a whole year by 1%, so there is not any good news for the weak Dollar there.
Houses will eventually find a bottom and they'll resume the normal house Boom and Bust cycle. The normal cycle was 10-15 years, and just now now was reduce to 5 years. How long will the next house cycle be, 2-3 years? The Last one really only held it together from 2003 until 2006.
Did you notice that Secretary Paulson has stopped singing "We need a strong dollar" anywhere, anyhow? Maybe he stopped believing in it. We too believe that he can wish whatever he likes, it is not happening.
Rate cuts and Tax cuts, will only make the Dollar weaker, by adding more Dollars into the markets. Going back to economics 101, we see that more is actually less. Let's compare sand to gold. Sand can be found anywhere, so it doesn't have a price, no rare value, but gold is hard to find, so it has a very big price tag; Same thing will happen to the dollar, as long as the Trade Balance continues to grow, more money will be printed. Low Rates with a weak currency won't help too much the poor old Trade Balance.
We are going to a recession or very near one and Commodities don't look too affected really. If gold and oil prices are so high now, how high will they be when the US goes out of a recession? Ooops, did a ball get dropped somewhere?
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