[North-NV-Greens] Fwd: [ALD] A blend of risks makes dollar's outlook grim

Fri Apr 1 00:47:54 PST 2005

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>http://www.iht.com/articles/2005/03/27/business/dollar.html
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>A blend of risks makes dollar's outlook grim
>By Daniel Altman International Herald Tribune
>Monday, March 28, 2005
>
>Traders' pessimism could bring sell-off
>
>Is the writing on the wall for the U.S. dollar? Researchers at one big fund
>manager say it is, but the markets haven't read along just yet.
>
>Since the start of March, Bridgewater Associates, a manager of more than
>$100 billion of institutional and hedge fund money based in Westport,
>Connecticut, has been issuing warnings in its daily reports. One on March
>11, titled "The Breakdown of the Dollar System," said, "As we often say,
>we've seen this movie many times, and we know the ending."
>
>There is indeed a volatile blend of risks surrounding the dollar.
>
>President George W. Bush's new budget proposal would substantially expand
>the government's debt burden in the next decade, potentially raising doubts
>about the desirability of its IOUs. Some Asian central banks have declared
>that they will diversify their reserves away from dollar-denominated assets.
>If China decouples the yuan from the dollar, it will not need as many
>dollar-denominated assets to keep its currency from gaining value, nor will
>its competitors for export markets. In recent times, long-term interest
>rates have stayed stubbornly low, making it difficult for American companies
>to attract new investment from abroad.
>
>These ingredients may just be waiting for the right catalyst. If enough
>people start thinking like those at Bridgewater Associates, the dollar will
>lose value rapidly. There is no point in buying dollars today, after all, if
>everyone thinks that they will be worth less in the near future. Fundamental
>economic factors need not worsen any further; in currency crises, perception
>very quickly becomes reality.
>
>Bridgewater says it believes that the dollar is already beyond the point of
>no return. To keep the currency at its current value, private investors will
>have to buy more American securities as central banks desert them, said
>Robert Prince, the firm's co-chief investment officer. Before private
>investors will act, they need to see a higher return from American assets,
>relative to assets carrying similar risks abroad.
>
>Prince said that those higher returns had begun to arrive through lower
>prices for assets. If an asset comes with a fixed interest payment, say 4
>percent, buying it at a lower price will offer a relatively higher return.
>But these higher returns could cause problems for the economy. Borrowers in
>the competitive market for credit will have to offer higher returns, too,
>and interest rates may rise.
>
>"The Fed doesn't want that, because too much of a rise in interest rates
>will choke off the economy," Prince said.
>
>The alternative is for the assets' prices to remain the same while the
>dollar loses value. That way, foreigners will be able to buy assets at a
>discount, yielding a higher return, but without putting too much upward
>pressure on American interest rates. (The implicit assumption here is that
>the assets' future returns will not be harmed too much by today's lower
>dollar.)
>
>So, instead of allowing the economy to adjust purely through higher interest
>rates, perhaps causing another recession, Alan Greenspan and his colleagues
>at the Federal Reserve will have the luxury of allowing the dollar to do
>some of the heavy lifting. The numbers? Bridgewater predicts a further
>decline in the dollar of 30 percent, especially against Asian currencies,
>and a rise in American long-term rates of one-half to one full percentage
>point.
>
>Not everyone thinks that events will play out this way. "It's really too
>extreme to be talking about potential crises in the dollar," said Martin
>Evans, a professor of economics at Georgetown University in Washington.
>
>"Yes, we have seen a large movement in the dollar versus the euro in
>particular, but to say we're sort of on the edge of a precipice isn't really
>merited by the facts. The premise here - thinking that it's impossible for
>the dollar to come back - I also don't buy."
>
>Evans said the Fed's hand would be forced by the rising tide of inflation.
>"The Federal Reserve cares about inflation," he said, "and they're going to
>be very reluctant if they start seeing the inflationary effects of the
>decline in the dollar to just sit by and say, 'But we need low interest
>rates to support exports."' He predicted that the Fed would put the clamps
>on credit, leading to interest rates high enough to attract foreign capital:
>"We are going to see quite a sharp tightening in the United States, perhaps
>tighter than people are expecting."
>
>Drastic predictions for the government's fiscal position may not come true,
>either, even though the White House's budget plans would raise the
>debt-to-GDP ratio in 2015 to 37 percent, versus 29 percent under current
>law. "I don't think it's big enough to warrant the attention it's gotten,"
>Douglas Holtz-Eakin, director of the Congressional Budget Office, said of
>the U.S. fiscal erosion. "A lot of the dollar's future will in fact be
>driven by the other determinants." That does not mean the budget can be
>ignored. Holtz-Eakin said he expected that the government would eventually
>have to move back toward a surplus.
>
>"It is unavoidable that we will rein in our spending," he said, "because we
>are unlikely to be able to tax enough to cover it."
>
>Though action by the Fed and a clampdown on government spending could spare
>the dollar, they would both be bad news for the economy.
>
>A cutback in government spending will, at least in the short term, create
>slack in labor and product markets. And one of the surest forecasters of
>recession is a tightening of short-term credit by the Fed.
>
>Congress and the White House have shown no sign that they are serious about
>controlling spending, but the Fed's policy-making committee may already be
>proving Evans right. After the committee opted to raise short-term rates
>another quarter of a percentage point last week, its statement acknowledged
>that "pressures on inflation have picked up in recent months" and asserted
>its willingness to act forcefully if necessary.
>
>Whichever way you cut it, we're in for a bumpy ride.
>
>
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-- 
Paul Etxeberri

"Forests precede civilizations and deserts follow"   ---Chateaubriand