This post first appeared on Minyanville.
Battle lines are being drawn. Sides chosen. Allegiances cemented.
But this war won't be waged with bullets; instead, it will be fought with words and ideas. The dollar wars are heating up.
Just a few weeks ago, the governor of the People's Bank of China, Zhou Xiaochuan, made unambiguous comments about his country's desire for a single, international currency. Gone, he said, were the days when the money of choice for global trade was that of a single sovereign nation. Russia, along with a host of other nations only moderately friendly to the US, expressed similar sentiments.
Today, firing back against the single-global-currency crew, Saudi Arabia, Bahrain and Qatar reaffirmed their support of the dollar. Bloomberg reports the 3 Gulf nations have no plans to abandon their US dollar pegs, applauding its resilience in the face of crisis.
Last summer, as the dollar tanked and inflation soared, experts feared these and other countries would push the dollar from its place atop the currency hierarchy. But amid signs that the US economy may no longer be in freefall -- and the rapid repayment of dollar-denominated debt -- the greenback has rallied more than 10% off its July 2008 lows.
Geopolitical grandstanding aside, the fate of the dollar and American corporate profits are inextricably linked. Corporate profits and jobs are also closely linked.
Big multinationals like Wal-Mart (WMT) and IBM (IBM) earned windfall profits by converting international revenue into dollars at favorable rates. As the greenback lost value over the last decade, those euros, pesos and reals earned abroad translated into bigger and bigger numbers when tallied here at home.
The dollar's recent strength has turned a windfall into a headwind. In the past month, MasterCard (MA) and McDonald's (MCD) blamed weak profit figures, in part, on the strengthening US currency.
And that's the high-wire act currently being performed by Federal Reserve Chairman Ben Bernanke and other US monetary and fiscal bureaucrats: A weak dollar buoys corporate profits, even as it keeps prices rising at home. Strengthen the dollar to combat inflation, and exports -- along with profits -- slump.
We've reached the critical juncture. After 18 months of running the printing presses around the clock to keep our economy out of the morgue, the relative wisdom of the Fed's ways will become increasingly clear.
At stake isn't just bragging rights on the global economic stage, but the integrity of the little green bills that keep the global economy running - the same ones each of us still uses to buy bread.
Showing posts with label currency. Show all posts
Showing posts with label currency. Show all posts
Friday, May 8, 2009
Saturday, March 7, 2009
Desperately Seeking Dollars: Greenback Catches a Bid
This post first appeared on Minyanville.
And while the answer to this conundrum is indeed complicated, its roots lie in how economic participants react to economic crisis and, ultimately, to deflation.
According to Bloomberg, in banking panics past, lenders tended to focus on doing business at home, rather than abroad. This makes logical sense: Bankers want to begin by helping those in their own backyards. The ongoing spat between Western and Eastern Europe, with the latter begging the former for help, is evidence that saving one’s own skin tends to take precedent when times get tough.
As a result, countries heavily reliant on foreign lending tend to fare poorly when such currency “protectionism” takes hold. Despite profound troubles at Citigroup (C), AIG (AIG) and Bank of America (BAC) -- to name but a few US financial institutions swimming in shark-infested waters -- many believe our banks, and indeed our economy, will fare better than those around the world.
Furthermore, as an economy spins out of control, politicians respond by firing up nationalistic rhetoric, urging a country’s citizens to band together. The widely-discussed “Buy American” provision in President Obama’s economic stimulus plan is but one example of lawmakers asking the electorate to “turn inward” in the face of danger.
Returning to the dollar, in addition to investors betting on the American economy to outperform its international counterparties, ongoing deleveraging favors the American currency. Dollar-denominated debt must be repaid with dollars, and as debtors scrounge up greenbacks to pay back their creditors, dollars become more scarce, driving their value upwards.
Deflation, which goes hand-in-hand with deleveraging, encourages consumers to hold on to cash, since as prices fall their dollars stretch further tomorrow, than they did today. Housing is a perfect example -- why buy a home today that will be worth less tomorrow?
The dollar is now approaching a near-term high not seen since the last time equity markets plunged to new lows (last November). This echoes Toddo's persistent theme of "asset class inflation vs. dollar devaluation." It's no doubt policymakers and the Plunge Protection Team are acutely aware of this relationship -- it's now a question of when, and how, they'll act.
Stay tuned, as Mr. Practical is apt to say: Risk is high.
And while the answer to this conundrum is indeed complicated, its roots lie in how economic participants react to economic crisis and, ultimately, to deflation.
According to Bloomberg, in banking panics past, lenders tended to focus on doing business at home, rather than abroad. This makes logical sense: Bankers want to begin by helping those in their own backyards. The ongoing spat between Western and Eastern Europe, with the latter begging the former for help, is evidence that saving one’s own skin tends to take precedent when times get tough.
As a result, countries heavily reliant on foreign lending tend to fare poorly when such currency “protectionism” takes hold. Despite profound troubles at Citigroup (C), AIG (AIG) and Bank of America (BAC) -- to name but a few US financial institutions swimming in shark-infested waters -- many believe our banks, and indeed our economy, will fare better than those around the world.
Furthermore, as an economy spins out of control, politicians respond by firing up nationalistic rhetoric, urging a country’s citizens to band together. The widely-discussed “Buy American” provision in President Obama’s economic stimulus plan is but one example of lawmakers asking the electorate to “turn inward” in the face of danger.
Returning to the dollar, in addition to investors betting on the American economy to outperform its international counterparties, ongoing deleveraging favors the American currency. Dollar-denominated debt must be repaid with dollars, and as debtors scrounge up greenbacks to pay back their creditors, dollars become more scarce, driving their value upwards.
Deflation, which goes hand-in-hand with deleveraging, encourages consumers to hold on to cash, since as prices fall their dollars stretch further tomorrow, than they did today. Housing is a perfect example -- why buy a home today that will be worth less tomorrow?
The dollar is now approaching a near-term high not seen since the last time equity markets plunged to new lows (last November). This echoes Toddo's persistent theme of "asset class inflation vs. dollar devaluation." It's no doubt policymakers and the Plunge Protection Team are acutely aware of this relationship -- it's now a question of when, and how, they'll act.
Stay tuned, as Mr. Practical is apt to say: Risk is high.
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