Reply #19: dollar watch

[UpInArms]

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Last trade 81.922 Change -0.125 (-0.16%)

Great U.S debt engine slips into reverse

http://blogs.reuters.com/great-debate/2008/12/12/great-us-debt-engine-slips-into-reverse/

excerpt:

In 1952, the U.S. economy had just $1.28 of debt for every dollar of GDP, and as late as 1980 this figure was still as low as $1.61. But beginning in the 1980s, financial services underwent a revolution that saw credit instruments per dollar of GDP rise to $2.28 in 1990, $2.67 in 2000 and a staggering $3.55 by the end of 2007.

<snip>

Capital repatriation explains much of the dollar’s recent surge against all the other major currencies except the yen.

Some commentators have suggested the dollar’s slide will resume once repatriation has run its course, and that a weak economy and damaged banking system will see a renewed substantial decline in the dollar’s value from early next year.

But as I noted in a recent column, the dollar’s behavior this decade has been inversely linked to the strength of the economy and the massive expansion of the financial system between 2002 and 2007.

Earlier in the decade, rapid U.S. growth sucked in imports faster than U.S. manufacturers could raise their exports, while some of the balance-sheet expansion leaked abroad in the form of net purchases of overseas assets by U.S. residents.

Since the United States could not fund all its imports, let alone asset purchases, from export earnings, the result was a steadily increasing net offer of U.S. financial assets to the rest of the world and persistent downward pressure on the currency.

Now the devaluation process has gone into reverse. Slower growth, and the liquidation rather than accumulation of overseas assets, have sharply reduced the U.S. external borrowing requirement during the last four quarters and resulted in strong dollar appreciation. (https://customers.reuters.com/d/graphic s/US_EXTFIN1208.gif).

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US Dollar Faces Fed Rate Cut, Canadian Dollar and British Pound Will Also See Heavy Event Risk

http://www.dailyfx.com/story/special_report/special_reports/US_Dollar_Faces_Fed_Rate_1229349860235.html

The Federal Reserve’s upcoming rate decision will easily be one of the biggest stories in the financial markets this week, especially since it may have a major impact on the US dollar and Japanese yen. However, forex traders should also keep an eye on the minutes from the Bank of England’s December meeting, as well as Canadian retail sales and inflation figures.

Federal Open Market Committee (FOMC) Rate Decision – December 16

On December 16 at 14:15 ET, the Federal Reserve is widely anticipated to announce a 50bp cut to the fed funds rate, which would bring the rate to 0.50%, according to 58 of the 85 economists polled by Bloomberg News. However, this is actually on the lower end of what the markets are expecting, as fed fund futures are pricing in a 76% chance of a 75bp cut to 0.25%. This upcoming monetary policy decision will be extremely important not only because of the prospect of such historically low rates, but also because the FOMC’s policy statement may signal that they are done cutting rates, or may suggest that they are prepared to pursue unconventional options like quantitative easing. The news could have major consequences for the US dollar and risk trends in general, meaning that the Japanese yen crosses may experience significant volatility.

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