U.S. dollar is weak

U.S. dollar is weak

In 2004, the U.S. was falling, but the dollar has never been tricky!

Germany's long term economic policy is to cultivate a steady trade surplus by saving more and consuming less. But there is another side of their trade surplus / high savings rate story. Growth in Germany is 1/3rd that the United States, and unemployment has doubled, productivity is similar to a fraction of what is in the United States. High taxes, over regulation, and pension system, which is in deep trouble, seems to contribute to the broad structural deficiencies that hold back German economic machine.

This comparison of the leading economy in the euro land with America is over simplified attempt to attract attention to the importance of understanding the dynamics behind the strengths and weaknesses of the country which, ultimately, reflected in currency values. So the Euro is increasing in U.S. dollars are falling. What gives?

For starters, I believe we all agree that the rise of the euro is less a story about Euro strength and really more a story about the decline of the dollar. Dollar bears argue that the long overdue structural reforms in the United States should be accepted now, and they point to a looming 6% trade deficit, and other issues that now seem to be threatened with collapse in the American values ​​in a disorderly world. My point is that the fall is U.S. dollars, bottomline, in a cyclical move lower than previously appreciated more level in 2002 when the euro was only worth 85 cents.

At this point the next long-term movement of the dollar is largely dependent on the answer to one question: Does the U.S. need structural reform, or is it the other nations of the world are under eating and under who have a need for production of structural reforms in order to restore balance to the global economy and currencies as well?

In the modern environment of economic interdependence, money flows from around the world are increasingly affecting individual, corporate and national wealth through nothing more than a change in the value of the currency exchange rate relations {a $ 1.3 trillion per day market}. Currency traders who understand the dynamics behind these changing foreign currency values ​​will profit consistently and significantly. Those who are willing to erroneous conclusions about the underlying forces of currency estimates are destined to be on the wrong side of currency trades and their losses will enrich those who were right!

In today's foreign exchange one currency environment continues to occupy centerstage as a reserve currency in the world - the U.S. dollar. Gold and oil are priced in dollars. The dollar is implicated in 85% of all transactions {Euro 37%, 16% Yen} and central banks around the world accumulate dollars as a necessity for stablizing exchange value of their national currencies. Offshore central banks to finance more than 50% of the trade deficit that way. Three of four dollars now in circulation are held overseas. And today as we see the U.S. dollar falls further and further away, we know that the rising price of gold and the recent $ 50 + price of oil
each largely reactions to the current and expected further reduction of U.S. dollars. In fact Saudi Arabia is leave it be known that he plans to adjust to a new baseline price of oil up from $ 25 to $ 35th Saudi Arabia also sold part of its dollar reserves in favor of the euro. There were stirrings that China is replacing the euro for some dollars into its huge cash reserve accounts. Net, Net, if the markets see this trend continue, the U.S. is certainly headed still lower. There are also more credible talk that the euro will replace the dollar as reserve currency in the world. After all the Euro now has a 20% stake as a reserve currency of choice by central banks worldwide, up from 13% for a short time ago.

Counter intuitively, we find the strengthening euro is not welcome in most of Europe and the world. True today as we begin 2005 and found the euro historically high level, about 50% of their full lows of 2002, German Chancellor Gerhard Schroeder said the new level of the euro is a concern for the German economy. French Foreign Minister calls for international conference to develop coordinated policies {read} for intervention to staunch the euro climbed against the dollar. ECB President Issing is problematic and urged European consumers to start spending to help avoid eurozone recession.

And Europe is not alone in concern about a sudden appreciation their currencies against U.S. dollars. The Japanese yen is up 25% in response, Japan 147.000.000.000 $ spent in the first quarter of last year alone sold their yen for dollars mainly in another of its periodic and futile attempts to manipulate currency values. China is ready to raise its Yuan's peg with U.S. dollar because the dollar's fall has dragged the dollar lower Chinese currency pegged to it and falls Yuan now threatens to ignite inflation in China is already over heated economy. Thus, as the euro, yen and other international currencies continue their growth in value as counterpoint to the fall of the dollar, have economic costs of work.

It seems that in practice worldwide, international economies, but not always their political leaders prefer a weak dollar. Indeed, in the chorus that grows stronger by the end of world political community are increasingly complaining about how our new era of globalization has become too American-centric, and calls became more urgent to resolve the serious global imbalances. The source of this global imbalance of course must be America! "U.S. consumer spending too much, he should stop it!"

In fact, the new consensus in the popular and financial press who, after studying all this, that there are 3 reasons for the U.S. move lower in 2002, all pointing to the United States. {Excessive consumption leads to record U.S. trade deficit} with your other hand, low domestic savings rate. And thirdly, the trade deficit is a twin - larger government budget deficit has become now a dollar is a negative contribution to the precipitous erosion of demand for the dollar.

There's plenty of opinion among those who follow the currency markets that you really fall in the dollar due to these types of structural problems that call out for America to reform. America must spend less, raise taxes and save more. And so their response to the question: "Is the U.S. dollar weak?" is a resounding yes, because the structure of the U.S. economy is weak!

There is a different opinion!

One thing to remember about currency markets is that just like water, they seek their own level. They inevitably find a balance and these protests against the strength of the euro suggests to me that the Euro is not quite ready to step up and remove the USD as a substitute in the global scheme of things for now. He also suggests to me that the dollar's decline is cyclical and therefore dollars, although it falls, it is weak.

However, there is reason to believe that markets are increasingly seen as a U.S. dollar now permanently lower plateau than in the past, and I agree. So let's revisit the question of the leading currency trader. "Is USD weak, or it falls in a normal cyclical adjustment?" We need to look closely at what's behind the dollar's move lower if we are going to be in anticipation of what is happening in the currency markets in 2005 and understand these dynamics, then we can capitalize on currency trades. Note: The Federal Reserve of the U.S. dollar index of 26 leading currencies orders decline of the dollar from February 2002, at 14%. It was what many consider to be overvalued level with the euro trading less than 85 cents on the dollar at one time. Today this basket of currencies shows U.S. dollars at the same level it was in 1994! In other words, it is synchronized with the past cyclical trends USD lower.

Despite the many statistics that show that current U.S. dollars grades in historic range, many governments, political leaders, economists and currency traders believe the U.S. is facing a crisis and must balance its trade account, reduce consumption and to return home for balanced federal budget was in 2000-2001. In the absence of such reforms, the United States invites the disorderly collapse of the dollar is certain to lead to global economic chaos

From the perspective of the international community, higher taxes would be the ideal response and contribute to all three drugs. They will reduce consumption and thus help to import skewed trade deficit, too, plus help point toward a balanced budget the federal government! They want to see taxes raised, consumers spent less and less growth rate in the U.S.. It sounds like they want the German experience as a model for the U.S.. Dollar bears and their supporters are willing to short U.S. dollars, while they may begin to see their drugs finding traction in the U.S. economy. But currency traders who buy in these recipes will be on the wrong side of U.S. dollars in trade in the long run. Dollar bears as they continue to sell dollars will have a long wait for profits in the wake of the collapse of U.S. dollars.

As a resident, citizen and student of the American economy, I can tell you, no trade deficit in the budget, nor in the U.S. are going to balance any time soon. More to the point, barring disaster, it is virtually impossible to see anything more than a narrow marginal. The domestic savings rate is not similar to rival the 9% level of the euro area, or 6% in Japan in the foreseeable future. In fact, except the American buyer miraculously morphs into avaricious European or Japanese clone {something that will not happen}, the annual U.S. savings rate will not be overcome even 3% in the ER, from the current 1% declines.

Quickly look at each one of these "consensus" reasons for the decline of the dollar and learn why so many currency traders who jump to the wrong conclusions about the U.S. dollar, and we will see in the event, opportunities open up for Facebook to be paid from being on the other side of the trade, ie, long USD. The question for currency traders is "When to buy dollars, not" if ".

A reality check of USD bearish analysis does not "Bear Up"

For those who say that the decline of the dollar should be understood as a reflection of an economy burdened with a structural weakness {and there are many famous economists who do}, as opposed to a currency that is lower in a cyclic motion, then appears that structural defects that dollar bears mention must be able to "bear up" under a reality check. We know that the U.S. economy grows 4% in 2004. We also know that between 1974 and 1994, productivity was approximately the same as in the euro zone now - 1.5%. But with the rise in productivity of U.S. corporate investment in IT in early 1995, U.S. productivity has more than doubled in the last decade, in 2003 and 2004, printed 4% gain, almost triple the levels of euro land.

While Fed policy on interest rates in the United States owe a negative real interest rates, inflation in the U.S. is so low as in the euro area is - 2%. So, on balance, we see the economic basis of U.S. dollars either defective or in need of reform. The U.S. economy is low inflation, increased productivity and high economic growth, all much better than historical trends, and all are expected to maintain these levels for as long as the eye can see. Of course, unemployment is much lower than the eurozone, and trending lower. But what about these structural problems in the U.S.?

Low savings rate

The rate of savings in the number of statstics is the simplest to explain and understand. Accountants add a total of earned wages, consumption and remove what is left over what they call "savings". The savings rate number as a measure of consumer wealth, consumer income, or even a loose approximation of consumer financial situation in the U.S. is only a small part of the puzzle, and has too often been used in a misleading way.

You can not assess the savings in America, without factoring in the housing. Three of four Americans own homes and the overall U.S. economy itself, the U.S. housing market is growing in a historic step. The move is so strong that housing sales and price levels continue to print new highs right through the economic recession of 4 years ago.

And even the much talked about "wealth effect" in the pre-recession, pre-bubble economy in the U.S. it appears that most of the benefit to the market gains that led to the March 2001 bubble, but as a token of appreciation in housing values ​​and mortgage refinancing at historically low interest rates {which generated widespread, opposition cash - cash payments upon refinanciing, because of much lower interest rates.}

So it turns out that even though there was equity market bubble, and recession in 2001 {not to mention the World Trade Center attack}, still flourishes in the U.S. economic structure was solid, built as the new higher levels of productivity than IT, housing wealth and low inflation. The recession caused by a greater rate policies of the Federal Reserve was, as stated on my radio show at that time, a good recession "and a necessary one brought on by over exhuberance of economic and investment" boom "in base of the U.S. economy. Federal Reserve Chairman Greenspan said the reason he raised rates was because businesses are investing too much in high technology and unsustainable rate. In other words - that the U.S. is a good thing too. High productivity, low inflation, strong consumer spending and rising U.S. home ownership profile are not structural defects of any economy, they are things that every economy seeks to affirm his power.

Now in 2005 and a recession begins far behind the United States clearly presents as economy that is stable and ready to consolidate its upward growth track, and thereby increase demand for its currency, the U.S. dollar.

Which leads us to the trade deficit.

As someone who lives in America have confirmed for you that for over a decade, Americans live in conditions of low inflation, a drastic improvement of unemployment, low interest rates, high real estate values, strong economic growth and the IT revolution that offers falling prices many of the latest and most appealing high tech leisure and entertainment products available from all over the world. Imports from foreign sources are low prices, thanks to a strong dollar in U.S. monetary policy and taxes are declining trend. One has to ask for the dollar bears, "Why did not the American consumers to spend and buy more and more imports? With interest rates at historic lows, housing wealth fueling personal savings {although not considered savings rate savings}, low inflation and low priced imports from Europe and Asia abundantly available, it would be odd if they did not spend, and Given the stalled growth in Japan and Europe, 2 and 3 largest economies in the world, it would be impossible for the U.S. that have no trade deficit. Americans are the largest importers of the world and that fact contributed much to international economic growth, but it also leaves America with the trade deficit.

So bottomline? Call for consumer demand to retrench in the United States is a call that will never be heard. It's like the wind and fog. It will not happen, and furthermore, a large trade deficit must be understood as "part of the deal, stemming from strong consumer driven U.S. economy is also stimulating global economic growth. Remember, the international economy is US-centric, because consumers in the United States.

Finally, let us look at the federal budget deficit in Washington.

The U.S. government budget deficit is easy matter to evaluate in terms of its relation to currency values. To begin with, the best, most informed estimate of future tax revenues needed to balance the Congress appropriates the expenditure is reasonably accurate for most, 60 days out. Budget deficit estimates have notoriously short life!

As the 2005 fiscal year began in October 2004, the only thing that is certain is that the real budget deficit there would be no where near his original work estimate. It never is! The Congressional Budget Office, the White House Office of Management and Budget, and every economist who follows federal budgets, none of them projected budget surplus by 2000/2001. In fact, most contemporary estimates were changed once a week during that period, and tax revenues exploded from hot U.S. economy at that time.

That being said, the idea of ​​a balanced budget principle that the U.S. should embrace. The budget for 2005 the projected deficit of 500 billion euros would push interest rates higher in the U.S.. But higher interest rates are USD positive. On the other hand, a 500.000.000.000 $ deficit will increase the need for higher taxes, which subtract from savings and investments, and so it is dollar negative. But then we need to think about higher taxes is what the dollar bears are prescribed to strengthen the dollar and the U.S. to help answer questions they see dragging the dollar down, and even higher taxes from their vantage point dollar positive!

I want to note that it would actually be dollar positive, and significantly so, Congress should adopt a "paygo" rule, as it was when the Congress sent to the excesses of a few years. The rule requires Paygo offset in any new discretionary spending or raise taxes or cut other spending, the maintenance of strict discipline in the budget. If the markets were seeing a balanced federal budget in the future of the U.S., they will expect more investments in the U.S. and lower interest rates and that will attract buyers of U.S. dollars.

The truth is that the end of the day a balanced budget is dollar positive, while the budget deficit affect the dollar exchange rate only in the marginal way, as long as they exist in conditions of strong growth and low inflation, which is found in U.S. present. By reducing it based on high productivity can discount the federal budget deficit at these levels in terms of significantly affecting USD currency values.

So it is quite apparent here in my "World Currency", that the structural strength of the U.S. economy preempts disorderly collapse of the dollar crisis that brings dollar project. Moreover, should the structural reasons for the decline of the dollar, its trade deficit, the rate of savings and government deficits are not starters as targets of reform, and more importantly, no structural weaknesses after all. The imposition of U.S. consumers to spend less through higher taxes will wreck the U.S. economy and in the process derail global economic growth. The global imbalances than obvious US-centric international economic environment is real, but they can best be addressed with greater consumption and other structural reforms of the international community of the sort the German model is resisting. The two points of view about where reform must occur next are actually two sides of U.S. trade.

The market will announce queue U.S. dollars as soon as you finish making up its mind on how low the bottom should be, given its new recognition now of the permanent status of the large U.S. trade deficit .. EUR / USD level of $ 1.40 and USD / JPY 100 yen, it can be a low point for the dollar, but if theyare not, they are awfully close. U.S. dollar falls, U.S. dollar is weak!



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