[OPE] Pundits' world: dollar weakness and the yen

September 24th, 2009
Global rebalancing to weaken dollar, quietly
Neal Kimberley

The dollar's premier status helps the United States to obtain foreign
capital and in order to keep that access, Washington is likely to encourage
central banks around the world to continue holding dollars. This would
require slow depreciation of the currency rather than a panicky slide. So
unless policymakers completely lose control of the forex markets - which
cannot entirely be ruled out - the dollar's slide is likely to be slower and
smaller than it was after the Plaza Accord, when the currency sank about 50
percent versus the yen between Sept. 22, 1985 and the end of 1987. The
overall direction of the dollar does not look in doubt, however. Top
presidential adviser Lawrence Summers has said he wants a U.S. economy that
is "more export-oriented and less consumption-oriented". A lower dollar is a
logical tool to achieve that goal, and letting the currency weaken would
probably be faster and easier than most other big policy steps to reshape
the U.S. economy, such as tax changes and health reform.
http://blogs.reuters.com/great-debate/2009/09/24/global-rebalancing-to-weaken-dollar-quietly/

Reuters, September 18th, 2009
Don't cry for the dollar, yet
Agnes Crane

...the dollar is still the No. 1 currency stashed in reserves around the
world, by a long shot. International Monetary Fund data showed the dollar
accounting for 65 percent of total allocated reserves in the first quarter.
That means there's only so far you can push the currency before the
self-interest of the world's savers kicks in to support the buck.

First a little perspective. The dollar's decline this year mirrors the rise
in risky assets like U.S. junk-rated corporate debt that have returned to
valuations seen before Lehman Brother's implosion. Just as credit markets
shut down and money poured into safe-haven U.S. Treasuries, the dollar
soared as currency investors viewed it as a place to hunker down until the
storm passes.

It may still be cloudy, but investors have been confident enough to venture
back into riskier territory like emerging markets, which are booming. That's
meant less money for U.S. assets. Recent data from the U.S. Treasury
confirmed as much when it showed net foreign capital outflows of $97.5
billion in July, up from the exit of $56.8 billion in the previous month.
The Fed's zero-bound interest rate policy has also turned the dollar into a
funding currency, where investors borrow in the low yielding dollar and
invest in nations that offer juicier returns.

"The dollar is selling off because we have low interest rates. That's a
macro fact," said Marc Chandler, global head of currency strategy at Brown
Brothers Harriman.
http://blogs.reuters.com/great-debate/2009/09/18/dont-cry-for-the-dollar-yet/

Principle of flotation
September 29, 2009 Tuesday, 03:07 PM
Goh Eng Yeow

With US interest rates at almost zero per cent and the greenback sinking to
almost all-time low against the Japanese yen and the euro, it is a
no-brainer for any bright trader to borrow heavily in greenback to make big
bets on other asset classes. In doing so, he is betting that when he has to
repay the greenback loan, the US dollar would have fallen sharply, and so
the asset he has brought would be worth a lot more in greenback terms. This
has propelled the stock market here, as well as those elsewhere in Asia
sharply higher, as cheap money floods the market and the resulting rising
tide lifts all equities - quite literally.

The carry trade is also providing the fuel for the renewed spate of mergers
and acquisitions. Just watch Wall Street last night when the Dow shot up 123
points on a wave of M&A fever. When money becomes so cheap, chief executives
start becoming empire builders again. (...) As the Japanese have discovered
to their horror, the switching out of yen into US dollar borrowings has
caused their currency to surge to near record high levels, raising fears
that their companies may be priced out of business altogether. This is
despite all the warning signals flagging red that it is in danger of falling
into a deflation trap again because of falling demand, as people anticipate
tougher times ahead and cut back on their spending. For the rest of us,
another fear looms - the spectre of run-away inflation if the prices of oil
and other raw materials surge and cause an untenable rise in consumer
prices.

So far, this has not happened. Because the US and Europe have been mired in
recession, demand has been weak and there is more than ample supply of oil
available, and this has dampened the pricing power of the producers. But
this sweet spot may not last forever. Eventually, the supplies would have
been used up, and there would be pressure to raise oil prices to compensate
for the weakening dollar. For investors, the best strategy going forward is
to track the US dollar. I expect regional markets to enjoy the sea of
support provided by the US dollar carry trade, until the greenback
strengthens and forces a un-winding of the carry trade. Then it is time to
get hell out of the market and stay in cash. It is worth recalling the
violence which had accompanied earlier unwinding of the yen carry trades
during the Asian financial crisis in 1997-98 and again during the recent
global financial crisis.
http://blogs.straitstimes.com/2009/9/29/principle-of-flotation

http://www.youtube.com/watch?v=Xl6NfQyNLto

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Received on Thu Oct 1 13:01:29 2009