Foreigners keep U.S. dollar propped up

[Yo_Mama_Been_Loggin]

ANDREAS WHITTAM SMITH
GUEST COLUMNIST

I shouldn't write anything about the weakness of the dollar. The governor of the Bank of England, Mervyn King, who has a much better idea of what's going on than I do, said the other day: "I have no idea where exchange rates will go in the future and I have no intention of ever starting to forecast exchange rates." And recently, Alan Greenspan, chairman of the U.S. equivalent, the Federal Reserve Bank, was equally dismissive, citing as evidence the "statistically robust finding that forecasting exchange rates has a success rate no better than that of forecasting the outcome of a coin toss."

Why should two of the world's leading central bankers emphasize the impossibility of predicting exchange rate movements at this particular moment? Because, I suggest, they both sense, though they cannot be sure, that the decline in the value of the U.S. currency could gather pace. If it does, they wouldn't want to be criticized by politicians for not having warned them. A dollar collapse would be an unpleasant experience for the United States itself and for Europe.

In terms of the euro, the dollar has never been lower. Even in the few weeks since President Bush was re-elected, the dollar has dropped by 2.5 percent in euro terms. Altogether it has lost 40 percent of its value in the past two years. The pound has behaved broadly as if it were in the euro camp. That is why we find American holidays good value. That is why British suppliers of goods and services have a hard time exporting to the United States.

This quite substantial decline, with its inevitable effects on trade, has passed largely unnoticed. Of course financial markets are up to speed, and so are companies whose international business is affected. The reason why the rest of us hardly have realized what is going on is that the United States' huge trade deficit has been financed without the least bit of trouble.

http://seattlepi.nwsource.com/opinion/201009_financing26.html

[Coryoth]

1. This is quite serious...

This is a very serious problem. Essentially the world is playing chicken to see who will pull out of the US Dollar first. Asia is doing the job of trying to prop it up, buying over $1.3 trillion in treasury securities to keep the US Dollar high. Their appetite for continuing to buy US debt is wanin however, and everyone else is watching the Dollar slide due to the current account deficit. Should the dollar fall in value, Asia stands to lose massively on those securities, but trying to dump them would simply let the dollar collapse, and they's still lose.

Try this for a good explanation of why everything could go very wrong for the US very suddenly. I may post some of my own thoughts on this issue later.

[cliss]

2. OK, if Mr. King won't, then I will.

Here's my prediction, for what it's worth:

1) Expect the US dollar to go down even further. Within the next few weeks, we'll see the dollar sink to new, unprecedented lows. I would guess the Euro will go to $1.45 or even $1.50 against the $$. The Bushies want this. They're not going to stop the slide.

2) Once the dollar goes to unprecedented lows, watch things start to come back a little. Think of world affairs and foreign exchange like the current moving in and out. You see powerful swirls of water. They have power and strengths of their own. So there will be mitigating effects to push the dollar back up, once it gets close to flat-lining. Example: tourism will shrivel up to almost nothing. Prices in Europe will come down. There will be some flexibility in prices.

3) Expect interest rates to go up. Expect some big increases, like around 10%.

4) Expect inflation to go up, by a hefty number. It's hard to guess here....maybe 4% or 5%?

[Coryoth]

3. There's not much to push the Dollar back up

There are, however, plenty of things that could happen that would send it plummeting further down. Beware.

[cliss]

4. Thanks C., for the link above.

I read it and I believe you are right. It's a titanic, world-wide game of chicken. Who will be the big loser? Japan, which has been propping up the dollar? China, which is sitting on the sidelines, watching us disintegrate daily?

Or will we all go down together? I guarantee the other countries will hesitate before they do something, because if they get out of the dollar, they might save their own asses, but it will start the collapse of the house of cards, and then everyone else will lose everything.

Who will be the first to lay down their cards?