The US dollar

Post by **mikepepler** » 30 Nov 2006, 16:05

Has anyone else noticed that the exchange rate is almost 2 dollars to the pound?
http://newsvote.bbc.co.uk/1/shared/fds/ ... traday.stm

I'm wondering what the implications are, here's my thoughts so far:
- The US will be unable to reduce interest rates, as its currency will get too weak. Apparently demand for US govt bonds (which fund their deficit) is already a bit weak, and interest rates must be high to keep demand up. Rising interest rates will have an adverse effect on the economy there, which will also be hit by inflation as import costs rise.
- The dollar cost of oil will rise - this was clear last time the dollar was weak.
- The pound cost of oil will not rise as much.
- The UK might be under pressure to reduce interest rates, because of the strong pound. However, the expectation that a further rate rise (due to inflation) is due in a few months is one of the things that's keeping the pound strong.

What do the rest of you think?

PS_RalphW · Post by **PS_RalphW** » 30 Nov 2006, 16:38

The commentary I have seen is that the dollar is falling because the
Fed has declared that it will NOT raise interest rates, and the market
is assuming it will cut rates to stimulate demand yet again, and
prevent the (inevitable) housing crash leading to a 'hard landing'.

The cost of everything (oil, metals, grain) is going up in lock step as
the dollar declines.

The real question is, since the Fed stopped reporting the M3 money
supply figure a year ago, it is assumed that they are printing (virtual)
dollars at about 10% a year. How long will the US's bankers (China and
Japan) put up with this?

The US is facing stagflation. UK exports to the US will be hit.
However, if the US does lose domestic demand, it might mean that oil
will be a little cheaper for the rest of us in real terms for a little longer.

omega3 · Post by **omega3** » 30 Nov 2006, 17:06

I suggest we all buy our Krugerrands now!

Check out the following web sites:

http://www.taxfreegold.co.uk/

http://www.atsbullion.com/index.html

RevdTess · Post by **RevdTess** » 30 Nov 2006, 18:34

The weak dollar is already driving oil prices up.

The US are stuck really, they'll struggle to cut rates to stimulate a flagging US economy while inflation is already signalling the need for a rate rise. Maybe the water flooding into the leaky ship is beginning to overwhelm the pumps!

Did you catch the article on "The Return of M3" ?

http://bigpicture.typepad.com/comments/ ... _of_m.html

Check out that money supply...

acrowe · Post by **acrowe** » 30 Nov 2006, 22:01

Its hard to find anyone who believes the dollar isn't going lower. You have virtually assured rate rises in the Eurozone and a near universal belief the fed will be cutting at the latest Q2 2007 in the states. China has been coming out with statements on how it is looking to reduce dollar holdings for awhile now and that is a very bearish thing in the long run (good for my gold/oil investments though).

One point i would make it that it is in the best interest of no one for the dollar to collapse. The dollar is also used as the main currency of many countries then just the USA. It is also important to remember that central banks and the large financial institutions around the world do have huge power to influence markets when needed, through derivative these factors should help put a floor under the dollar in extreme circumstances.

If you haven't already starting to buy some gold on the dips wouldn't be a bad idea

RevdTess · Post by **RevdTess** » 01 Dec 2006, 00:11

acrowe wrote: One point i would make it that it is in the best interest of no one for the dollar to collapse.

I just found out today that our company, being owned by Americans, is paying year end bonuses in dollars... Doh! I should refuse their worthless greenbacks and insist on the coin of the realm!

ianryder · Post by **ianryder** » 01 Dec 2006, 00:24

Tess wrote:I just found out today that our company, being owned by Americans, is paying year end bonuses in dollars... Doh! I should refuse their worthless greenbacks and insist on the coin of the realm!

Well, if this winter does get really cold there's something to burn at least - might be cheaper than gas

isenhand · Post by **isenhand** » 01 Dec 2006, 06:09

Tess wrote:
I just found out today that our company, being owned by Americans, is paying year end bonuses in dollars... Doh! I should refuse their worthless greenbacks and insist on the coin of the realm!

Is that legal now? If memory servers (and it might not do so as I?m remember bits of my economics and public affairs / history from my O level days), its illegal to pay in anything other than coins of the realm. I think this is one of those laws that is liberally interpreted as it should stop people being paid directly into the back but it doesn?t. However, I think it should stop people being paid in US dollars.

Post by **mikepepler** » 01 Dec 2006, 08:10

acrowe wrote:One point i would make it that it is in the best interest of no one for the dollar to collapse.

But if you put yourself in the position of, say, China, then what do you do? Agreed, you don't want the dollar to collapse, as you sell a lot of stuff to them. But at the same time, you hold over 1 trillion of reserves, mostly in dollars. If you really believe there might be a collapse, you have to start diversifying your holdings, making the collapse a somewhat self-fulfilling prophecy if enough traders and countries buy into it.

snow hope · Post by **snow hope** » 01 Dec 2006, 08:54

Yes, this whole dollar situation is a real Catch 22. This morning it is at almost $1.97 to the ?1.

As said by others if the dollar sinks further, then the whole world will increasingly be likely go into recession. China will be hit hard as its exports will be curbed substantially. The Americans are between a rock and a hard place regarding interest rates, internal market stimulation and external market forces on resources and commodities, thus inflation will keep pushing upwards.

It will be interesting to see how "creative" they can be. If I had spare money, I would definately buy Gold.

I can also see a house price crash coming in the UK. I have spoken to some people 'in the know' on housing in the UK and they think I am absolutely off my rocker in this regard. We shall see.

The more China and Russia diversify their currency holdings, the worse the Catch 22 becomes. The only saving grace for the Americans is that oil is traded in dollars. They will not let that change!!

Post by **mikepepler** » 01 Dec 2006, 09:36

snow hope wrote:The only saving grace for the Americans is that oil is traded in dollars. They will not let that change!!

Although the side-effect of this is that when the dollar falls, the price of oil goes up, as it has a "real" value, as opposed to the "virtual" value of a fiat currency. Hence the Americans pay more for their oil. Serves them right

What will be interesting will be if the exchange rate clears $2 to the pound, as the market and traders seem to like "round numbers", as we've seen over the years with oil prices. Maybe if it clears $2 it will the go a lot further?

ianryder · Post by **ianryder** » 01 Dec 2006, 11:06

One thing which is really important in this but I haven't seen it much mentioned (feel free to correct me if you've just said this somewhere else!) is that in the old days this situation would encourage people to buy goods made in the US which would help to solve the problem. Seeing as everything is made in China now there aren't going to be the same options available.

Quite entertaining to watch anyway - I'm predicting $2.20 sometime soon and then complete collapse! Well, it's either that or they start sticking up interest rates and then we really are into serious times with housing. Maybe we should have a predict the $3 to the ? competition

omega3 · Post by **omega3** » 01 Dec 2006, 11:43

To understand the historical and current situation of the dollar, I heartily recommend taking a look at the following Google Video of a speech by Ron Paul (Texas) before the U.S. House of Representatives on the 15th February 2006 entitled 'The End of Dollar Hegemony':

http://video.google.co.uk/videoplay?doc ... q=ron+paul

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

"Sometimes you get your best light from a burning bridge"

biffvernon · Post by **biffvernon** » 01 Dec 2006, 13:09

Tess wrote: I just found out today that our company, being owned by Americans, is paying year end bonuses in dollars... Doh! I should refuse their worthless greenbacks and insist on the coin of the realm!

I'd be grateful of any end of year bonus, even in cowrie shells

RevdTess · Post by **RevdTess** » 01 Dec 2006, 14:11

biffvernon wrote:
Tess wrote: I just found out today that our company, being owned by Americans, is paying year end bonuses in dollars... Doh! I should refuse their worthless greenbacks and insist on the coin of the realm!
I'd be grateful of any end of year bonus, even in cowrie shells

Yep, I was half-expecting a "stfu you lucky sonofabitch!"