Monday, August 18, 2003

The majority of 'global rebalancing' scenarios require the US dollar to fall significantly -- if slowly -- so as the begin to dig away at the stunningly enormous US current account deficit (at 5.1% of GDP in 2003:I) and direct capital away from the US and into other economies. With the US economy appearing to return to some respectable if not vigorous level of GDP growth, toss the rebalancing scenarios out the window.
The dollar neared a 3-1/2-month high against the euro and rallied broadly against all major currencies on Monday as technical patterns accelerated a dollar uptrend fueled by recent solid U.S. economic data. . . .

According to dealers, relatively weak economic reports from the euro zone have given U.S. data additional significance, as traders see reason for optimism that the economy is poised for sustained growth.

"Right now, the focus is just shifting a little bit to the U.S. economic picture being a bit stronger than the European picture," said Cyrus Whitney, head dealer with Commerzbank in New York. "Now that the euro has broken (below) $1.1215/1.1220 support ... the euro could ultimately try $1.10 over the next couple of days."
Get this. The euro is down from its all-time high of $1.1870 on June 5 to $1.1135 this afternoon -- a big 6.2% drop in just over two months. That of course means a big 6.2% rise in the dollar. Per the broad dollar index, the US dollar is up 2.5% since its recent low on June 16.

A stronger dollar is likely to keep capital flowing into the country, keeping interest rates low and the "recovery" on track. It is also likely to exacerbate disinflation, continue to crush the US manufacturing sector, and will surely blow the current account deficit up like a balloon. Global recovery seems premised, as always, on US growth. Yet in the early 1990s when the world did the same thing, the US current account deficit nearly balanced in the face of US recession. This time around the world continued to loan and loan and loan to the US, and must continue to loan and loan and loan continually.

Good for the US perhaps (too bad if you're hoping to get recalled to the factory after that layoff). Bad for the home countries having their capital sucked out of them. Global rebalancing without somebody's real economy paying the price looks to be impossible -- and that's where the politics will play themselves out.


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