Will the Feds ever step in to stop the devaluation of the Dollar or will we see the Euro at $3 by the end of the year? If I would know the answer to this question, my financial decisions would be much easier to make.
Who is putting the most pressure on you? Those that want a strong dollar? Not likely.
Most likely it is the banks and financial institutions that are on the brink of insolvency. After all, they are big campaign contributors and have lobbyists with deep pockets.
Thus, you pander to them. You bail them out. Dollar be damned.
As long as bond market is happy, weak dollar is good for the economy.
Will the Feds ever step in to stop the devaluation of the Dollar or will we see the Euro at $3 by the end of the year?
I don't expect to see the Euro at $3 by the end of the year, not because the Feds would step in to stop the devaluation, but because Europeans will either cut rates or be forced to do a currency intervention.
I wouldn't rule out the Swiss Franc at $1.50 by the end of the year, though.
I think it's a big misconception that the falling dollar is somehow the Fed's fault. First of all, the dollar has weakened, but this doesn't make it cheap. A different point of view is that it was extremely overvalued not long ago, because of all the capital inflows chasing the new economy supposedly built here. I remember talking to a friend at UBS in 1999, and she was very nervous back then about the dollar being "obscenely overvalued", as everybody from Europe, Asia and the Middle East was busy piling into it.
Now we see the same thing in reverse. On top of that, we've had rather large budget and trade deficits lately. That's not really the Fed's fault, either. The administration is mostly to blame for the budget deficit, and the overvalued dollar itself (and China's policies, to some extent) for the trade deficit.
If you think interest rates are to blame for the dollar's fall, think again. Fed fund rates are now just a tad lower than ECB euro rates, and were actually quite a bit higher in 2006 and 2007. It's not higher euro rates that caused the dollar drop, it's fundamentals. The dollar was way overdue for a correction, and like all "bubbles", the only question about the dollar unwind was its timing. My friend was way early in 1999, Buffet was kind of early as well (in 2003, I think), but it finally happened. Don't blame the Fed for it.
Um, cutting interest rates increases the money supply. This weakens the dollars purchasing power relative to commodities and other currencies with a more limited supply.
But yeah, you are correct that there is more than the Fed at work here. They still swing a big stick when it comes to dollar valuation, however.
Several people mentioned that the fed will start defending the dollar when the bond market makes them. Can someone explain this? From what little I know about this, I think the theory is that the falling dollar will cause inflation and then the bond markets will demand higher interest rates. However, from what I can see, as long as the government prints out monthly interest rates that say we have no inflation (even if that's just a ridiculous bald faced lie) the bond markets are believing them. Maybe I'm wrong about all this. Can someone explain this some more? Thanks,
Yes, you got it perfectly right: all other things being equal, a weak currency fans inflation, through higher import prices. This leads to higher long-term interest rates, as people buying bonds want to be compensated for the higher inflation. That's it.
Then how come rates are so low today? In a nutshell, it's very simple, really: you may not believe inflation is low, but the bond market clearly does.
They certainly swing a big stick. But the ECB's got one, too, and they don't hit very hard with theirs, either. I don't have a chart handy, but I think the ECB's rate has been around the 2% - 3% range for as long as I can remember. Hardly tight monetary policy, and, still, the euro is up 50% or so against the dollar. My argument is that fundamentals matter much more than rates over the long term. And those fundamentals showed the dollar being too strong for its own good at the end of the last decade. Remember that the last coordinated central bank intervention (Fed, ECB, Bank of Japan) was in support of the euro. Nobody's making any noise yet to support the dollar, which shows that the central banks are much more comfortable with today's exchange rates than to those of 2000.
"Then how come rates are so low today? In a nutshell, it's very simple, really: you may not believe inflation is low, but the bond market clearly does."
1.) Do you believe that the Chinese and Japanese government are buying treasuries (or holding the junk they have) becuase they believe inflation is low. I don't.
2.) Cash is being horded in treasuries because of a flight to quality. Investors are making a decision to buy treasuries because they are concerned about losing principal in defaults are via stock market crash not because they think inflation is low. If they can drive
up the price in treasuries in the process more money for them.
3.) There is so much cash sitting around (hmmm wonder where it all comes from) looking for a safe place to be parked I'm surprised the t-bonds and t-bills are yielding any positive interest rate at all.
4.) Even if there were some bond vigilantes that believe that inflation is higher than what the current treasury market reflects do you honestly think they have a friggin prayer in the world of fighting forces 1-3 above? I sure as hech don't. So instead of shorting treasuries they buy gold, commodities, other currencies and put shorts on the dollar.
My point is that the treasury market (in particular) may not at all reflect current inflation expectations the way it may have in the past. There are many other fundamental forces at work. The bond vigilantes are not dead they are just being heard through other channels.
My point is that the treasury market (in particular) may not at all reflect current inflation expectations the way it may have in the past.
One note:
For the last two weeks, implied yields on TIPS maturing in Apr '10 have been NEGATIVE. Meaning that nominal yields on 2-year treasuries are currently lower than expected CPI inflation over the same period of time.
Submitted by Deal Hunter on March 15, 2008 - 5:26pm.
Nothing to worry about. As long as the US Dollar is the world's reserve currency, there won't be a mass dumping of US treasuries. Us Americans will always dutifully pay our taxes - that's why the "full faith and credit" of Americans is nothing to sneeze at.
Now, what we should be worrying about is any indication that oil will decouple from the US Dollar. If the world decides it wants to buy and sell oil with anything else, like Euro or Yuan, then it spells trouble of the US Dollar.
Still, I wouldn't worry. You know what happened to the last guy who tried to sell his oil with Euro......... and you thought it was because he was responsible for 9/11. LOL.
Your #1 argument is very good. Foreign central banks (especially the PBoC) have been very aggressive buyers of Treasuries, in order to prevent their own currencies from rising against the dollar. Interest rates would certainly be higher if not for their intervention. How much higher I don't know, and I'm pretty sure nobody really does.
However, there is still a lot of private money pouring into long-term bonds. They may be wrong (maybe they're just pension funds on autopilot, supposed to invest a certain percentage of assets in bonds). But they're there, and it would be arrogant of us to dismiss them all as dumb money.
Also, let's make one thing clear: this is not just a short-term "flight to quality" thing. First of all, long-term rates have been quite low for awhile (the Greenspan conondrum), since way before the current crisis. Second, "flight to quality" means that investors pile into cash (aka very short-term Treasuries), not long bonds. If you are hoarding cash, you buy 3 month or 6 month T-bills. Not 30 year bonds or 10 year notes.
So I think the bond market really has low inflation expectations, as strange as this may seem to some here. I happen not to share those expectations (I posted recently on another thread that I have no money invested in bonds), but I do acknowledge them.
I think a better question is at what point will all the foreigners holding dollars dump them for something that retains value better.
Imagine you are a politician or in the FOMC.
Who is putting the most pressure on you? Those that want a strong dollar? Not likely.
Most likely it is the banks and financial institutions that are on the brink of insolvency. After all, they are big campaign contributors and have lobbyists with deep pockets.
Thus, you pander to them. You bail them out. Dollar be damned.
JWM in SD
When the bond market makes them defend it.....
When the bond market makes them defend it.....
Yeah...
As long as bond market is happy, weak dollar is good for the economy.
Will the Feds ever step in to stop the devaluation of the Dollar or will we see the Euro at $3 by the end of the year?
I don't expect to see the Euro at $3 by the end of the year, not because the Feds would step in to stop the devaluation, but because Europeans will either cut rates or be forced to do a currency intervention.
I wouldn't rule out the Swiss Franc at $1.50 by the end of the year, though.
I think it's a big misconception that the falling dollar is somehow the Fed's fault. First of all, the dollar has weakened, but this doesn't make it cheap. A different point of view is that it was extremely overvalued not long ago, because of all the capital inflows chasing the new economy supposedly built here. I remember talking to a friend at UBS in 1999, and she was very nervous back then about the dollar being "obscenely overvalued", as everybody from Europe, Asia and the Middle East was busy piling into it.
Now we see the same thing in reverse. On top of that, we've had rather large budget and trade deficits lately. That's not really the Fed's fault, either. The administration is mostly to blame for the budget deficit, and the overvalued dollar itself (and China's policies, to some extent) for the trade deficit.
If you think interest rates are to blame for the dollar's fall, think again. Fed fund rates are now just a tad lower than ECB euro rates, and were actually quite a bit higher in 2006 and 2007. It's not higher euro rates that caused the dollar drop, it's fundamentals. The dollar was way overdue for a correction, and like all "bubbles", the only question about the dollar unwind was its timing. My friend was way early in 1999, Buffet was kind of early as well (in 2003, I think), but it finally happened. Don't blame the Fed for it.
Don't blame the Fed for it.
Um, cutting interest rates increases the money supply. This weakens the dollars purchasing power relative to commodities and other currencies with a more limited supply.
But yeah, you are correct that there is more than the Fed at work here. They still swing a big stick when it comes to dollar valuation, however.
Several people mentioned that the fed will start defending the dollar when the bond market makes them. Can someone explain this? From what little I know about this, I think the theory is that the falling dollar will cause inflation and then the bond markets will demand higher interest rates. However, from what I can see, as long as the government prints out monthly interest rates that say we have no inflation (even if that's just a ridiculous bald faced lie) the bond markets are believing them. Maybe I'm wrong about all this. Can someone explain this some more? Thanks,
XBoxBoy
Yes, you got it perfectly right: all other things being equal, a weak currency fans inflation, through higher import prices. This leads to higher long-term interest rates, as people buying bonds want to be compensated for the higher inflation. That's it.
Then how come rates are so low today? In a nutshell, it's very simple, really: you may not believe inflation is low, but the bond market clearly does.
Kewp,
They certainly swing a big stick. But the ECB's got one, too, and they don't hit very hard with theirs, either. I don't have a chart handy, but I think the ECB's rate has been around the 2% - 3% range for as long as I can remember. Hardly tight monetary policy, and, still, the euro is up 50% or so against the dollar. My argument is that fundamentals matter much more than rates over the long term. And those fundamentals showed the dollar being too strong for its own good at the end of the last decade. Remember that the last coordinated central bank intervention (Fed, ECB, Bank of Japan) was in support of the euro. Nobody's making any noise yet to support the dollar, which shows that the central banks are much more comfortable with today's exchange rates than to those of 2000.
"Then how come rates are so low today? In a nutshell, it's very simple, really: you may not believe inflation is low, but the bond market clearly does."
1.) Do you believe that the Chinese and Japanese government are buying treasuries (or holding the junk they have) becuase they believe inflation is low. I don't.
2.) Cash is being horded in treasuries because of a flight to quality. Investors are making a decision to buy treasuries because they are concerned about losing principal in defaults are via stock market crash not because they think inflation is low. If they can drive
up the price in treasuries in the process more money for them.
3.) There is so much cash sitting around (hmmm wonder where it all comes from) looking for a safe place to be parked I'm surprised the t-bonds and t-bills are yielding any positive interest rate at all.
4.) Even if there were some bond vigilantes that believe that inflation is higher than what the current treasury market reflects do you honestly think they have a friggin prayer in the world of fighting forces 1-3 above? I sure as hech don't. So instead of shorting treasuries they buy gold, commodities, other currencies and put shorts on the dollar.
My point is that the treasury market (in particular) may not at all reflect current inflation expectations the way it may have in the past. There are many other fundamental forces at work. The bond vigilantes are not dead they are just being heard through other channels.
My point is that the treasury market (in particular) may not at all reflect current inflation expectations the way it may have in the past.
One note:
For the last two weeks, implied yields on TIPS maturing in Apr '10 have been NEGATIVE. Meaning that nominal yields on 2-year treasuries are currently lower than expected CPI inflation over the same period of time.
Nothing to worry about. As long as the US Dollar is the world's reserve currency, there won't be a mass dumping of US treasuries. Us Americans will always dutifully pay our taxes - that's why the "full faith and credit" of Americans is nothing to sneeze at.
Now, what we should be worrying about is any indication that oil will decouple from the US Dollar. If the world decides it wants to buy and sell oil with anything else, like Euro or Yuan, then it spells trouble of the US Dollar.
Still, I wouldn't worry. You know what happened to the last guy who tried to sell his oil with Euro......... and you thought it was because he was responsible for 9/11. LOL.
Pemeliza,
Your #1 argument is very good. Foreign central banks (especially the PBoC) have been very aggressive buyers of Treasuries, in order to prevent their own currencies from rising against the dollar. Interest rates would certainly be higher if not for their intervention. How much higher I don't know, and I'm pretty sure nobody really does.
However, there is still a lot of private money pouring into long-term bonds. They may be wrong (maybe they're just pension funds on autopilot, supposed to invest a certain percentage of assets in bonds). But they're there, and it would be arrogant of us to dismiss them all as dumb money.
Also, let's make one thing clear: this is not just a short-term "flight to quality" thing. First of all, long-term rates have been quite low for awhile (the Greenspan conondrum), since way before the current crisis. Second, "flight to quality" means that investors pile into cash (aka very short-term Treasuries), not long bonds. If you are hoarding cash, you buy 3 month or 6 month T-bills. Not 30 year bonds or 10 year notes.
So I think the bond market really has low inflation expectations, as strange as this may seem to some here. I happen not to share those expectations (I posted recently on another thread that I have no money invested in bonds), but I do acknowledge them.