Re: Dollar at new low against euro

In article <1193683669.107978.7950@xxxxxxxxxxxxxxxxxxxxxxxxxxxx>,
vello <vellokala@xxxxxx> wrote:

<deletions>

You are not twenty years old, Eugene and you surely know that trend
for today morning is just for today morning. I would be really
surprised if dollar would become a junk currency in 10-15 years to
come. Let's play prophets: my guess, that at the end of 2008 dollar is
about 13 kroons, so approx 10% stronger against euro then today. Your
bet?

With economics one should never bet. A major source of the problems of
the dollar is the fact that it is a so-called 'low yield currency'.
Dollar interest rates are low and being lowered; interest rates on
dollar savings and the return on conservative investments are lower than
inflation. The US government seems to be encouraging the American
population to spend rather than save or invest conservatively. As I see
it, there are two possible major scenarios.

1. The Chinese, Russians, and Middle East oil states decide that a
reliable dollar is in their interest and do everything they can to
compensate for the domestic financial mismanagement that has allowed the
dollar to slip as it has been doing during the past few months. This
will mean that they hold on to their dollar holdings and US government
bonds. trying to ride out the storm. Then a dollar rate between 10 and
13 kroons is possible next year.

2. The Chinese, Russians, Japanese, and Middle East oil states, or at
least one of this constellation, decide that it is no longer in their
interests to hold vast amounts of dollars and US government bonds that
are rapidly losing value due to American cynicism, interest rates that
are lower than inflation, and domestic financial mismanagement. They
sell off a major part of their dollar holdings, thus driving down the
international exchange rate because fewer and fewer people are
interested in buying or holding a mismanaged, sick currency.

No matter which of these scenarios occurs, we must not forget that the
Chinese, Russians, Japanese, and Middle Easterners own a massive amount
of dollars. Decisions made in Beijing, Moscow, Tokyo, Riyadh, and
Bahrein rather than decisions made in Washington D.C. are going to
determine the fate of the dollar in the short term. The Bush
administration, which seems to be quite happy to allow the dollar to
slide in order make American exports cheaper, imports to the US more
expensive, and domestic consumption a good option and savings a poor
one, will be with us for some fifteen more months. A lot can change
during such a long period. It is not written in gold that dollar must
forever be the international reserve currency, nor can the Americans
assume that the major players are going to continue to stand by and
watch America spend itself into oblivion with others picking up the tab.

My bet is that the major decision maker will be China. For the time
being, China has enjoyed domestic growth rates in excess of 11%, but it
has seen much of that achievement eroded internationally because Beijing
wants to retain its favorable market position in the United States and
has allowed the yuan to slide downwards along with the dollar. Much the
same holds for the Japanese yen. Given that the EU is a larger economy
than the US, and that Russia is also beginning to flex its economic
biceps, there is no reason to assume that Chinese and Japanese good-will
are givens. Nor, for that matter, should we assume that the oil
producing countries in the Middle East will continue the practice of
pricing and selling their oil in dollars only.

Regards,
Eugene Holman
.

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