The World Tires of U.S. Dollar Hegemony

November 6, 2008 by · Leave a Comment
Filed under: Opinion 

Here is a nice article that explains the dramatic rise in the U.S. Dollar and the USDX currency basket.  The yen has been quite strong in the last few weeks while the carry-trade unwinds.  At the time of this writing, the USDX was at 85.88.  This is a decline from 86.32, which was the top of this last rally.  Now that presidential elections are done and we have had a 900 point drop in the DJIA, this is not a good sign but fits my prediction of the calm until the elections.  We will see more declines and that will mount more pressure on congress to do more bailouts.  The Big 3 automakers were meeting with Nancy Pelosi to beg for $50-100 billion more in emergency loans or they will go bust.   Be safe.

Commentary:

What explains the paradox of the dollar’s sharp rise in value against other currencies (except the Japanese yen) despite disproportionate U.S. exposure to the worst financial crisis since the Great Depression?

The answer does not lie in improved fundamentals for the U.S. economy or better prospects for the dollar to retain its reserve currency role.

The rise in the dollar’s exchange value is due to two factors.

One factor is the traditional flight to the reserve currency that results from panic. People are simply doing what they have always done. Pam Martens predicted correctly that panic demand for U.S. Treasury bills would boost the U.S. dollar.

The other factor is the unwinding of the carry trade. The carry trade originated in extremely low Japanese interest rates. Investors and speculators borrowed Japanese yen at an interest rate of 0.5 percent, converted the yen to other currencies and purchased debt instruments from other countries that pay much higher interest rates. In effect, they were getting practically free funds from Japan to lend to others paying higher interest.

Source: Creators

 

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