The $1.10 Canadian dollar
I suspect the USD is going to drop a fair bit yet. Certainly nothing that the Fed or the Administration has said suggests otherwise. And why not?
China has for its own excellent reasons refused to allow the upward revaluation of its tightly controlled currency. Which has made its manufactured goods strikingly cheap and pulled in lots and lots of the world’s money (and not just USD). A great deal of the demand for its products has come from America at a significant cost to the American economy in terms of lost jobs in manufacturing.
So the US has decided not to intervene to halt the dollar slide. The speculators have realized this and are dumping dollars with both hands. Dollar holders such as the Chinese government, the Japanese Central bank and assorted other entities are piling on. Now, the question is whether the US has an exit strategy here and to what degree the Chinese/Japanese/other dollar holders want to see their USD depreciate.
Here’s the problem, while the Chinese - and to a lesser extent the Japanese - might dearly love to switch a couple of trillion dollars into almost any other currency actually accomplishing that is not at all easy. What do you buy instead? Gold? Sure. And you might even back your currency with gold as England and then America did for many years. But gold is a store of value rather than an income producing asset. So, Euros and Euro denominated instruments? Attractive for the first few hundred billion but are there enough sound Euro investments to soak up a trillion dollars. And are the economies in the Euro area likely to thrive in the next decade or will the Euro combination of demographics, social programs and entrenched bureaucrats and trade unions keep the Euro economies stuck in a low growth mode?
As for Canada, 1.10 or 1.20 are two edged swords. On the one hand they allow Canadians to buy retail goods in the States cheap. And, if you are brave, it makes some of Wall Street look cheap. But it will kill the tourist industry, cripple the film biz and crunch the forest industry. Not good for a huge chunk of the Canadian economy. It is fairly good news for oil, gas and mining in that demand for oil and gas and uranium is relatively price inelastic until prices go really nuts.
If Canada or Canadians had a lot of USD debt this would be a great time to repay it; but the vast majority of Canadian sovereign debt is issued in Canadian dollars.
One thing to keep in mind is that this sort of swing can end up being a “bear trap”. That is that if and when the US government and the Fed decide the slide has gone far enough they may be able to intervene strongly in the currency markets and cut the shorts off at the knees.
The current US Secretary of the Treasury, Henry Paulson is an ex-chairman of Goldman Sachs with wiring extending throughout the financial world. Letting the dollar fall and, perhaps, trigging a run to sell Treasuries could allow the US to mop up those treasuries at 60-70% of their face value while, at the same time, clobbering the speculators who are short dollars. It would be audacious and risky but Paulson certainly has the connections to do it.
Written by jay on November 8th, 2007 with
1 comment.
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#1. November 10th, 2007, at 5:07 AM.
The thing I have wondered about is: Is it really in the US’s interest to have a strong dollar (as much as everyone there talks about a “strong dollar policy”).
The weak USD means that foreign imports are more expensive, exports are cheaper (which would continue economic growth). US Real GDP is still pretty strong (3.8% in Q2 and 3.9% in Q3).
Fully agree that this is not good for Canadian manufacturers, but (my opinion from having worked in manufacturing) we have relied on a cheap dollar for too long. There is no excuse for not investing in the tech and equipment needed to improve productivity.