Just delete it from here and repost in the LR…
Let me just take a guess, but you don’t have a great deal in FX and international trade. While a weak dollar might put a crimp on our ability to afford Cervelos or Italian villas, a weak dollar would be very good for the U.S. balance of trade. If you look at our deficit it’s *&%^ scary. The people who need help right now are not the U.S. consumers, but rather U.S. domestic industry. As such, a weak dollar is a welcome sight for many. This was one of our biggest issues with China pegging their currency. Ultimately it will be foreign direct investment that fuels the next economic expansion. It is much easier to get their on someone elses currency.
China’s been dumping goods on the rest of the world by pegging the Yuan to the USD at artificially low levels for ages. It really is out of hand. It has really hammered the current account of most western nations. Of course, a weaker USD vs the rest of the world changes nothing…the Yuan will follow and the current account deficit will continue.
I’d love to see the Yuan strengthen vs the US dollar. My company’s biggest customer is in China. It would allow them to by our products for less Yuan and while that does nothing for us (as our prices are fixed in USD), it means they’ll likely nickel and dime us a bit less!
No you most likely wouldn’t be owed less money because you probably have to be paid in your currency. Therefore the U.S. corporation will actually have to pay more but you would get the same.
However a lot of large corporations would be hedged against a currency collapse so they may not have to pay more anyways.
Grant
Trust me, I’m unbelievably stupid on many a topic. In fact I am not allowed to play Trivial Pursuit without a partner because it gets embarrassing. Obviously I cannot proof my own posts either. That notwithstanding…
As background I point you to the following article by our friends at the Fed. They wrote it much better than I can:
http://www.chicagofed.org/consumer_information/strong_dollar_weak_dollar.cfm
However, in your example, absent a hedge you would be effectively owed less money. However, at some point the amount you would be owed would become large enough that you want to hedge against currency fluctuations in order to mitigate this risk. That said, the way a weaker dollar works for the U.S. is by attracting foreign direct investment. When these parties pump money into the U.S., or buy our goods abroad, it positively impacts our balance of trade. The net net is that this translates into a reduced deficit, decreased foreign borrowings and therefore less overall cost of operations in the future (since we pay less interest). Down the road this cash infusion should also boost productivity and innovation, which will drive the economy, corporate profits, etc. It’s a virtuous cycle.
Agreed on all fronts. One day they will float. One day.
Slimjim
If there is any particular question , you are looking for " an informed " opinion , I would be happy to give you an unbiased opinion.
Currency flows do not only move , on economic fundamentals and respective monetary policy , but often on the relative “perceived” value that : corporates , funds and traders who participate in the global foreign exchange markets , have.
PM me, if there is something you would like explained and I will attempt to enlighten you.
Terry
With the likes of Russian, China, and countries in the Middle East threatening to dump their stashes
Are you talking about a strategic attack on the economy by dumping US treasuries, or are you talking about loss of sustainability of the trade deficit?
The specter of, say, the US and China getting into an incident in the Taiwan strait or over Iran’s nuclear facilities, and them launching a punitive dump of US securities to cripple our economy is bandied about from time to time, especially when things get tense. Which may be why you’ve seen something on it recently. It’s theoretically possible but the opinions I’ve seen suggest that it would likely be far harder on China’s economy (which is almost totally dependent on ours), and would be a particularly unwise move given their economy’s current growth rate and need for capital to keep the machine oiled up.
The question about the trade deficit and the issue of valuation of the Yuan in that context has been answered by the other posters.
It’s theoretically possible but the opinions I’ve seen suggest that it would likely be far harder on China’s economy (which is almost totally dependent on ours), and would be a particularly unwise move given their economy’s current growth rate and need for capital to keep the machine oiled up.
You are making the assumption that China thinks like us and is not prepared to wound itself significantly if it perceives that there is an advantage to doing so.
How confident are you in this assumption?
You are making the assumption that China thinks like us and is not prepared to wound itself significantly if it perceives that there is an advantage to doing so.
How confident are you in this assumption?
You make an excellent point and one to which I do not have The Answer. For the short term, I think Hu is a practical man and I think it would take more than the standard cyclical dust-up for them to make such a move. Given the wide global consequences and vast uncertainty about what the actual effects would be, I’d say there’s a high bias against. The Chinese take a much longer view than we do and I think might do something that would lead to 20 or 50 or 100 years of domestic pain if they truly believed it would give them 200 or 500 or 1000 years of hegemony. But I think they’d have to be pretty sure about what they were going to get out of it to cripple their own economy and take a chance on creating a domestic backlash or even a revolution. The forces that ultimately brought down Soviet communism were economic, after all, and I don’t imagine that fact is lost on the Chinese.
I would guess that if they tried to start a run on US securities that we construed as an attack rather than an economic event, the US govt would halt trading and refuse to honor the debt. But I don’t know how that would work exactly or for how long.
But, if your larger point with respect to US strategy going forward is that we need to get a grip on the trade deficit, I’m with you.
Do you have some specific thoughts about this?
The dollar’s slide: How far, how hard?The currency sank about 2.5 percent against the euro in the last 5 sessions. More losses may be coming.
By Katie Benner, Fortune reporterNovember 29 2006: 12:00 PM EST
(Fortune Magazine) – U.S. currency traders gorged on Thanksgiving turkey and took a half day last Friday while the rest of the world quietly bet against the dollar.
At first, it looked like a handful of speculators were taking advantage of light trading volume, which makes it easier to move a market up or down. But then more players started lining up against the greenback, too, and the worries hit harder than post-holiday indigestion. 
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The dollar has tumbled about 2.5 percent against the euro in the five sessions through Tuesday. Although the greenback came back a bit Wednesday, the dollar’s near its weakest against the euro since March 2005. The dollar also fared badly against the British pound, though it’s done slightly better against the lowly Japanese yen.
“With the dollar debacle, the health of the economy, current and future, is on trial,” said Brian Wesbury, chief economist at First Trust Advisors.
And he, like many other traders and strategists, sees a weaker dollar in the months to come thanks to a combination of slower economic growth, the possibility of interest rate cuts from the Federal Reserve and long-term trends in international currency markets.
Currencies typically have a six- to seven-year cycle of adjustments, said Quincy Krosby, chief investment strategist at Hartford Financial. “If you look at February 2002 as the strongest point in the cycle, I do think will ease a bit more. But that’s also just part of the adjustment process that began and is continuing.”
Many observers have been bearish on the dollar since the start of 2006, when the so-called yield curve in the Treasury bond market kept inverting, meaning that investors got a better return on the short-term, two-year government bond than on the long-term, 10-year Treasury note. That’s the opposite of how yields usually behave - and an inverted curve preceded the nation’s last two recessions.
But back at the start of the year, most economists said it looked unlikely the United States was headed for a recession this time - that the economy would not stumble on a housing slump, rising interest rates in Europe or a series of rate hikes by the Federal Reserve. Now, some fear that those comforting predictions may not hold true.
Foreign banks, for example, may be deciding that the United States is getting too risky because the U.S. economy doesn’t look as attractive with sluggish growth ahead, said Naomi Fink, director of foreign exchange strategy at BNP Paribas.
“It reminds me of the time surrounding the tech boom when many equity analysts were saying that P/E ratios were irrelevant,” said Fink, referring to the relationship of stock prices to corporate earnings. “Similarly, we shouldn’t have discounted arguments for a slowdown in the U.S. Prior to this recent move, currency traders were ignoring bad data, or only looking at the good elements of the bad data.”
The bad data begins includes the housing slump, said money manager Hugh Moore, a partner at Guerite Advisors, who’s forecasting a recession sometime in 2007.
“The jobless recovery happened after 2001 because of home equity,” said Moore. “Wages stagnated, but people didn’t want to give up their lifestyles.” So instead, they borrowed against the value of their homes. He estimated that home equity withdrawals in 2004 and 2005 totaled about $1.4 trillion, and that two-thirds of that fueled consumer spending. Consumer spending in turn fuels more than two-thirds of economic growth, so its importance can’t be underestimated.
Moreover, Wesbury said that more rate hikes from the Fed remain a possibility, or at least the central bank won’t cut rates anytime soon. Wall Street has been anticipating a cut for months, hoping that the Fed would lower the benchmark rate to keep the economy from slowing too much.
But Fed Chairman Ben Bernanke said in a speech Tuesday that while growth should pick up next year, inflation remains a “worrisome” threat, which could mean that the Fed’s next move on rates is a rate hike, and not a cut.
Much of the recent betting against the dollar has been on the expectation that a weak U.S. economy would force the Fed to cut rates. Lower rates make the dollar less attractive relative to other currencies.
Meanwhile, Wednesday’s upward revision to third-quarter economic growth indicates that economy is growing modestly, while a key inflation gauge dipped.
That should ease short-term concerns about a recession, but, as Krosby points out, there was no pop for the troubled greenback.
“The GDP numbers were upwardly revised, but there was immediately no significant strengthening in the dollar. If the market instinctively believed the economy was chugging along well, there at least would have been a knee jerk reaction.”
Perhaps the dollar’s muted rebound against the euro Wednesday can be traced to the news that new home sales fell a larger-than-expected 3.2 percent in October, quelling hopes that the worst of the real estate slump was over.
“What we really should focus on is that fact that the Americans were on holiday and foreigners decided to sell,” said Axel Merk, manager of the Merk Hard Currency Fund, which has $47 million under management, referring to the dollar’s recent drop. “Given the extent to which we’re dependent on foreigners to prop up the dollar because of our current account deficit, that’s worrisome.”
“A dollar decline is in nobody’s interest, but it’s highly overdue and will happen at some point,” Merk said.