Tuesday, April 05, 2005

Yet more evidence for the aphorism "You can't beat something with nothing."
The dollar climbed to a five-month high against the yen and the strongest in seven weeks versus the euro as economic growth in Japan and Germany falters.

``What has surprised the market this year is the fact that Japanese growth has been so weak and we've also seen downward growth revisions from Europe,'' said Shahab Jalinoos, a currency strategist at ABN Amro Holding NV in London. ``The dollar has shown a sustained ability to bounce back.''

Japan's currency dropped as a government report showed household spending fell in February, adding to evidence the Japanese economy is struggling to sustain a recovery from recession. The euro declined as a report showed growth in European service industries stagnated in March. . . .

Japanese and European central banks are expected to keep their benchmark interest rates unchanged at policy meetings this week to help spur growth in their economies, according to the median forecasts in surveys of economists by Bloomberg. The rate gap with the U.S. has widened as the Fed lifted its target rate seven times since June to head off inflation. . . .

Japan's currency may fall to 110 before the end of the week, Christensen said. The U.S. currency may also climb as high as $1.2730 per euro by the weekend, he said, driven by U.S. interest- rates expectations.
Really the only hope for global re-balancing to even begin is for US interest rates to begin choking off US consumption. Without the cut-backs to consumption, higher rates will only stoke a higher dollar which will encourage even more imports and more imbalance.

And with both the eurozone and Japan faltering, the only hope for the US current account is quite frankly a US recession. Dramatically rising US exports are not going to happen. I can't say that we'll see recession this calendar year however. This runaway train has too much of a head of steam still. One has to wonder if a CA deficit of 7% of GDP in 2005 is too conservative an estimate . . .

And one more thing. The markets aren't ignoring the swelling US CA problems, but even the nay-sayers can't see any significant impact on the dollar.
Concern record U.S. current-account and budget deficits will fail to be matched by sufficient capital from abroad will still send the dollar lower this year, said UBS's Mohi-Uddin. UBS, the world's largest currency trader, forecasts the U.S. currency will decline to $1.36 per euro and 103 yen by June 30.
Note that, because of US inflation and Japanese deflation, �103 in June 2005 is the same as about �111 in June 2003. In June 2003 the actual value of the dollar was �118, so according to Mohi-Uddin by June 2005 the dollar will only have declined a mere 6% in real terms in two years. Moreover, we'll still be nowhere near the level at which the Bank of Japan will feel the need to begin intervening massively as they did in early 2004. The world's central banks aren't propping up the dollar so much as private capital is.


At 5:57 AM, Blogger Mark said...

It would intersting for you to review some of the older blogs, to see how the economy has shaped up.

the dollar is really low now to the pound and this must be reducing spend as well as increasing tourism etc.
House sale are also slower.


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