Blaring Headlnes: Dollar Index, Stress Tests, bloated Treasury markets, equities holding support, China jawboning, U.S. threatening others with currency manipulation, non-U.S. based banks deemed to be the safest, and the U.S. based sub-prime crisis as the accepted root cause of the economic downturn, adds up to one thing;
Regional GDP growth from regions outside of the U.S. will lead to a move to liquidate ‘safe play’ long-dollar positions, and will lead to a move into the safety of growth from those free of massive forward debt obligations. Those moves will likely target 72.00 on the dollar index before global markets will need to step in again to protect the Usd, as they did in March 2008 when the index hit that area after the Bear Stearns debacle.
“It was the same cycle in 2002-2005, and will once again likely lead to the Fed increasing interest rates over a period of time that then moves the Usd back higher. The cycle of a lower Usd valuation may be about to start again, with signals that are every bit as strong as those seen in both recent U.S. economic business cycle moves.” TheLFB Team said.
“The mobility of the financial markets to move prices is staggering, with anything traded in such vast amounts electronically and instantaneously now impacting all areas of globally traded markets. A major move in any one global market will very likely be felt in them all at some stage soon after. Once momentum starts it is hard to stop, and the half full Usd glass may quickly turn to half empty if the U.S. is not one of the first global regions to show growth”.
“The safe play move in 2009/10 may be away from the dollar after twelve months of global markets hiding under the Usd safety blanket; it may be time to accept that a change is very likely if equity markets can base out around these levels”.
“The U.S. will always be a major global player, but may not come out of the sub-prime and credit crisis as the only major global player. With such distorted Debt/GDP ratios it may not be that the U.S. can dominate forward growth forex valuations, especially when the expected 12% budget deficit will have to be borrowed via the Treasury market, rather than earned”.
“There is no other major economic region that relies as heavily on overseas debt holdings to fund its day-to-day operations as the U.S., and just having the largest economy may not be enough going forward, not when that economy is wracked with inverse debt ratios. The fact that the Fed is issuing its own debt and directly buying it back has the effect of de-valuation of the dollar”. TheLFB Team said.
The call seems to indicate that a race to growth may affect forex valuations more than anything else at this stage in the global business cycle. It is not clear as to what major region that will post positive GDP above the expected first, all seem to be hurting in equal measure at this time, but if it is not the U.S. it seems inevitable that the dollar will quickly de-value. Japan and China are the world’s number two and three largest economies and in reality both hold the U.S. purse strings in regard to Treasury holdings.