Tuesday, August 5, 2008

Bullish Case for the Dollar

Another fascinating read. Thanks for to Ron on this one. I am not a currency investor or trader and don't really have an opinion. I think he could be wrong on the ability of the Fed to be hawkish and not having to lower interest rates again (definitely not hawkish today) and I think he is definitely wrong on the ramifications of a much stronger dollar on the U.S. economy. I do believe however that most people underestimate the importance of large currency moves on equity markets. Either way another interesting read.


Basic thesis

If you have all the major industrial central banks in the world lowering interest rates, while simultaneously the Fed is hawkishly about to raise rates, that in itself will perpetuate the flow of money. Funds will flow into the U.S. and out of the rest of the world. That forces the central banks around the world to continue to lower interest rates, chasing the flow down. And the Fed is poised to continue to raise rates as more and more funds chase the higher yield.

Disagree with this

Think further beyond about the ramifications of the potential of $1.5 trillion USD flowing into the U.S. banking sector. Wouldn't that be attractive to bank's balance sheets at the very moment that the world's #1 financial sector needs capital at all cost? If the world's biggest financial sector were to be propped up by a continual flow of funds into their banks, then the U.S. will be poised to move forward out of its current economic malaise flush with capital coming in from abroad. And beyond that, the world's largest economy will then pull any other country out of recession.

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