Is this a last hurrah for the ol' greenback?Thu Nov 24, 2005 02:56
Is this a last hurrah for the ol' greenback?
By Ambrose Evans Pritchard (Filed: 24/11/2005)
The world's two richest men have both lost a slice of their fortunes this year betting against the dollar.
Microsoft's Bill Gates said with fulminating certainty in Davos last January that it was time to "short" the greenback. "The ol' dollar is going down. It is a bit scary. We're in uncharted territory when the world's reserve currency has so much outstanding debt," he said.
His friend Warren Buffet kept pace, switching $22billion (£13billion) of Berkshire Hathaway funds into foreign currencies. He said it pained him as an American, and broke the habits of a life-time. But a country living so far beyond its means with a zero savings rate and a current account deficit nearing 6pc of GDP was about to pay the inevitable price.
Indeed, the world was "choking on the diet" of surplus dollars, he said.
Well, the mighty dollar has surged more than 16pc against both the euro and the Japanese yen since Davos. But is it possible that Mr Gates and Mr Buffet were just a year too early?
David Bloom, a currency expert at HSBC, says vindication may now be at hand for dollar perma-bears after Tuesday's release of the US Federal Reserve's November minutes. We learned that the Fed's dovish camp had cautioned against the "risks of going too far with the tightening process", even though US producer prices are still rising at 8.4pc a year.
In other words, the monetary squeeze may soon be coming to an end after 12 rate rises from 1pc to 4pc since June 2004, even if a December rate rise is still certain.
"We're at a key turning point in market psychology. People can see the peak in the dollar cycle," said Mr Bloom.
"At some point, the market is going to start looking once again at the massive imbalances in the US economy, and when that kind of thinking takes hold, the dollar is going to fall off a cliff," he said.
"I think it could happen by the first quarter of next year," he said. HSBC's team predicts a slump in the dollar to around €1.35 and yen100 within a year.
The Fed minutes prompted near euphoria on the US equity markets, lifting the Dow Jones index over 200 points to around 10,900.
Right or wrong, investors seem to think the Fed is happy to let rip on the M3 money supply, up 10.1pc at an annual rate over the past four months, and delicious for equities - at least for now.
The Fed is even planning to abolish M3 data altogether, prompting howls of protest from America's small rump of monetarists. Contrast the dovish tones with the ever more hawkish noises coming from the European Central Bank, where M3 (now rising at 8.5pc) still matters.
Frankfurt is cocking the trigger for its "tightening process" after holding rates at 2pc for two and half years, leaving no doubt that rates will rise a quarter point next week. If past is prologue, it will keep going once it tastes blood. The futures market is already pricing in three rises.
The end of easy money is a blow to the lucrative "carry trade", which has allowed funds to borrow cheap in Europe and re-lend for a tidy profit in America, boosting the dollar on the way.
Japan too is awakening from deep torpor. The Nikkei stock index has reached five-year highs this month. Property prices are creeping up in Tokyo after losing 80pc over 15 years of grinding deflation.
The Bank of Japan is not yet ready to lift interest rates above zero, a step still viewed as too risqué. But it is itching to stop printing $12billion a month to cover the Japanese budget deficit. There too, the "tightening cycle" has begun, if gingerly.
Julian Callow, an economist at Barclays Capital, said the global economy is swivelling on its axis.
"The ECB's move to raise rates is highly significant. It's not something they do lightly," he said.
"I suspect the dollar rally is on its last legs of support. As we enter the New Year, the market is going to start focusing again on the gigantic US deficit. It may already be turning now," he said.
Analysts says the great dollar rally of 2005 has been fed by euro-jitters after France and Holland drove a stake through the European Constitution with "No" votes, and the one-off effect of an obscure change in US tax law.
Under the Homeland Investment Act, US firms can slash 30pc from their tax bill by repatriating funds this year. HSBC believes this has amounted to an $80billion-$100billion inflow, now largely spent.
But there are still big unkowns in the opaque world of offshore finance. Although Opec oil states are splashing out gaily on Mercedes cars, Italian suits, and Airbus jets - importing four times as much from Europe as from the US - they appear to be recycling the bulk of their petro-dollars into US Treasury bonds and other dollar assets, albeit outside US territory.
Stephen Jen, a currency expert at Morgan Stanley, said the oil shock may perversely be supporting the dollar, even though it has led to a record trade deficit of $66.1billion in September as oil imports explode.
Nor is there any sign that the Chinese, Japanese, and other Asia central banks have become at all tired of mopping up US debt in order to keep a lid on their own currencies.
Lord Keynes, who wrote his first thesis on the Indian rupee and was a currency man before he went macro, said it was hazardous to predict exchange rates, and doubly dangerous to takes bets on clever insights.
"The trouble with currencies is that they never do what they damn well should do," he said, badly burned on the markets in the 1920s.
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THE REAL REASON WE ARE AT WAR!
TIME MAGAZINE NOVEMBER 13, 2000 - Page 34
FOREIGN EXCHANGE
'SADDAM TURNS HIS BACK ON GREENBACKS'
http://www.apfn.org/apfn/iraq_reason.htm
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Dollar off as Fed minutes suggest pause ahead
By Steve Johnson in London and Jennifer Hughes in New York
Published: November 22 2005 11:34 | Last updated: November 22 2005 22:06
CLICK FULL REPORT:
The dollar fell against the euro on Tuesday as interest rate differentials dominated market activity.
================================
TIME MAGAZINE NOVEMBER 13, 2000 - Page 34
FOREIGN EXCHANGE
SADDAM TURNS HIS BACK ON GREENBACKS
Europe's dream of promoting the euro as a competitor
to the U.S. dollar may get a boost from SADDAM HUSSEIN.
Iraq says that from now on, it wants payments for its
oil in euros, despite the fact that the battered
European currency unit, which use to be worth quite
a bit more than $1, has dropped to about 82 cents.
Iraq says it will no longer accept dollars for oil
because it does not want to deal "in currency of the
enemy."
The switch to euros would cost the U.N. a small
fortune in accounting paperwork changes. It would also
reduce the interest earnings and reparations payments
that Iraq is making for damage it caused during the Gulf War,
a shortfall the Iraqis would have to make up.
The move hurts Iraq, the U.N. and the countries receiving
reparations. So why is Saddam doing it? Diplomatic
sources say switching to the euro will favor European
suppliers over U.S. ones in competing for Iraqi contracts,
and the p.r. boost that Baghdad would probably get in
Europe would be another plus.
-By William Dowell/ New York City
====================================================================
Saddam Turns His Back on Greenbacks
By WILLIAM DOWELL/NEW YORK CITY
http://www.time.com/time/archive/preview/0,10987,998512,00.html
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