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Old 11-11-2009, 01:07 PM   #1
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Default Watching the USD Drop? Here's What You Should Really Be Watching


The USD vs the JPY is weakest in years. Yes, the DXY dollar index has been hitting new lows around 74. Yes, US government debt and deficits (the 2 infamous “D”s) have been skyrocketing and are projected to keep on growing in the coming years. Yes, the printing presses started by Ben Bernanke might be running faster than most people are comfortable with. And yes, the coming inflation will lead to further devaluation of the dollar which the government will not attempt to stop because they are happy to inflate away their piles of debt.

We’ve all heard the reasons for the demise of the US dollar. But here’s the bigger picture. The USD does not exist in isolation in the forex markets. Every USD exchange rate that is quoted is RELATIVE to other currencies. The US dollar will depreciate relative to other currencies in the long term, if and only if, fundamental conditions in the US are RELATIVELY MORE worse than in other major economies. And probably the most important currency cross to RE-consider is the USD-JPY, which has recently touched 10-year lows.

Worried about the US debt burden are you? There is enough reason to be – the debt-to-GDP ratio is projected to rise from 65% to 80%.

The ageing population in the US is going to stress the social welfare programs which will cause deficits to rise even further. But you just might be worrying about the wrong deficit.

Here’s a reference point – Japan’s debt-to-GDP ratio at the end of 2008 was 173% (trumped only by Zimbabwe at 241%) and is forecasted by the IMF to rise to 200% by 2010. Japan’s population structure is now so lopsided that its death rate per 1000 people exceeds its birth rate (despite having one of the world’s highest life expectancies), and Japan hardly benefits from the growing young immigrant populations that the US enjoys. As a result, Japan’s population has been declining since 2007. Let’s talk about social welfare. The US has fewer and fewer people in its workforce that are available to support the growing pool of retired citizens. In 2009, this ratio stood at around 4.5 working age citizens for every person above 65.

In Japan, this ratio stands at 2.5. While the US economy derives about 70% of its GDP from its consumers, the Japanese economy is much more export driven and hence much more dependent on global demand. With the kind of conditions and start-stop recovery forecasted globally, Japan has a lot more to lose than the US.

And finally, one of the biggest arguments against the USD is countries diversifying their reserves away from US Treasuries. Contrary to popular belief, China does not OWN the US. In May 09, the US owed China (the biggest foreign holder) $772 billion which is only about 6% of the roughly $12.9 trillion in total national debt. Any attempts to diversify could just be a ripple in the ocean, a ripple that might just hurt the lenders more than the debtor.

All that to say, with the USD/JPY cross standing near 10-year lows, we could be staring at a huge opportunity, only to watch it go by. How could you translate this into a strategy? Go short JPY, long USD.

Or more directly, go short Japanese Government Bonds (JGBs). Remember that this is a view for the medium-to-long term, as traditional moves to the “safety” of the USD might persist in the near-term. UUP (US Dollar Bull) filed to issue 100 million new shares to meet rising investor demand – if that’s any indication, the tide may already be turning.

"It is better to have lived one day as a tiger than a thousand years as a sheep." -- Tibetan proverb
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Old 11-11-2009, 05:11 PM   #2
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So Japan is totally, completely screwed, but we are even more screwed than that. Sweet.
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Old 11-11-2009, 11:17 PM   #3
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Either one blowing up will take out all the others. It's only a matter of which order... who wants to be first?

BTW, we might survive Britain going down, but the Euro-union? Not a chance...

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Old 11-12-2009, 07:30 PM   #4
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Treasury Secretary Timothy Geithner pays lip service to keeping dollar strong

The Obama administration may prefer a weaker currency because it's a boon to U.S.
exporters, but no one is going to say so for fear of waving a red flag at markets.

By Tom Petruno
The Los Angeles Times
November 12, 2009

Treasury Secretary Timothy F. Geithner issued another emphatic statement about the need to "maintain a strong dollar," but financial markets know he wasn't serious.

After Geithner's comments in Tokyo on Wednesday, an index of the dollar's value against six major rivals rebounded from a new 15-month low to end the day slightly higher.

But the Obama administration, like the Bush administration before it, is paying only lip service to the idea of keeping the greenback strong even as the currency continues to lose value against its major and minor foreign rivals.

This is theater, but it's still important in the scheme of things, says Dan Katzive, currency strategist at Credit Suisse in New York.

Although global markets fully expect the dollar to stay weak because of rock-bottom U.S. short-term interest rates and soaring federal borrowing, among other reasons, Katzive notes that it's in everyone's interest for any further decline in the currency to remain orderly -- which pretty much describes the dollar index's 37% drop since mid-2001, including this year's slide of 7.6%.

The last thing the world needs is a sudden dollar collapse that could trigger market pandemonium.

With traders already inclined to keep selling the U.S. currency, imagine the market's reaction if Geithner were to say, "You know, we've thought about it, and we'd really like to see the dollar fall a lot more."

Even if the administration believes that -- given that a weakening buck is a boon to U.S. exporters -- no one in a position of power is going to say so for fear of waving a red flag at markets.

Instead, by reiterating the stock phrase about dollar strength, "they're assuring the markets that the U.S. isn't going to talk the dollar down," Katzive says.

Besides, the administration has to be figuring there's no reason to mess with success.

Consider: One long-term concern about a falling dollar is that it could undercut U.S. financial markets by scaring away foreign investors, whose dollar-denominated assets lose value as the greenback falls.

But the Treasury bond market isn't suffering from a lack of investor demand even though the administration is borrowing record sums. And the U.S. stock market, too, remains robust, as investors see dollar weakness as good news for American multinational firms. The Dow Jones industrials rose to a fresh one-year high Wednesday.

"It's the best of everything right now," says Win Thin, a currency strategist at Brown Bros. Harriman in New York.

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drop, usd, watching

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