On top of deflation and recession, now the Germans have to face a rocketing euro which hit US$1.17 today. The electronic herd is fleeing the greenback thanks more to John Snow's remarks than anything really concrete like say a $500 billion current account deficit and a sluggish economy. Who in their right mind wants to flee into yen? There is always gold (which closed at $359.75 per oz. today, up nearly 13% just since early April) or the mattress in the spare guest room in the summer mansion, but euros look like the ticket these days -- especially in light of the rather high ECB interest rates. Maybe the Europeans will finally face reality and lower their rates next month, capital will bid the dollar back up, the US current account deficit can go to $700 billion in 2003, and the whole thing will explode just in time for Bush's re-election campaign?
The Levy Institute thinks the dollar needs a 25% decline to find a sustainable level. So far the broad dollar index is down less than 9%. There's still a loooong way to go, and we ain't seen nothin' yet!