the dollar

[jk]

i was looking through some charts when i came on ewz [the ishares brazil tracking etf] and it looked
really familiar; it looked a lot like gold. i then looked at the
other trackers of overseas markets and noticed the same pattern.
they were all part of the "everything's rising on a sea of
liquidity" market, though some rose faster than others. the
overseas markets corrected from early may to early june, just like
gold. and then they all started to recover, just like gold.

until july 3. from that date forward they all uncoupled. gold
rose and the trackers fell.

this might explain some of the dollar's strength. money is being
repatriated to the u.s. from overseas, and especially from
emerging markets. then some of it is being used to buy gold.
this would support the dollar and also contribute to gold rising
vis a vis the dollar.

the dollar will tank when overseas investors repatriate from the
u.s. these, the foreign holders of dollar assets, are different
folks than the ones on the receiving end of u.s investments abroad.

[blazespinnaker]

Re: the dollar

Sea of liquidity ... I dunno. The more and more I think about this, it's not liquidity, but globalisation and productivity. Basically, we have all this money sitting around and it doesn't have to go to wages or buying DVD players ... so where does it go?

Hard assets - gold, real estate, etc.

Recently, oil prices and geo politics have been sky rocketing which is putting a damper on the economy. But, other than those two things, I believe that the world wide economy is fundamentally sound.

I think what happened in the real estate market was that prices started to go up.... and people panicked and pushed it all above where it was supposed to stop. I think we'll see a reversion to where it was supposed to be, but unless oil prices jump up much higher (they certainly can!) I don't think we'll see a capitulation in either the stock or the RE market.

[jk]

Re: the dollar

Sea of liquidity ... I dunno. The more and more I think about this, it's not liquidity, but globalisation and productivity. Basically, we have all this money sitting around and it doesn't have to go to wages or buying DVD players ... so where does it go?

Hard assets - gold, real estate, etc.

Recently, oil prices and geo politics have been sky rocketing which is putting a damper on the economy. But, other than those two things, I believe that the world wide economy is fundamentally sound.

I think what happened in the real estate market was that prices started to go up.... and people panicked and pushed it all above where it was supposed to stop. I think we'll see a reversion to where it was supposed to be, but unless oil prices jump up much higher (they certainly can!) I don't think we'll see a capitulation in either the stock or the RE market.

the amount of money, in all its various manifestations, that is "sitting around" is determined by central banks policies. whatever the effects of globalization and productivity, the decisions of the boj, the pboc and the fed determine how liquid the world is -- are people and insitutions holding demand deposits or bonds. [see john hussman's essay on the fed.] and the cb's determine how costly it is to borrow. money doesn't "sit around" independently of cb policies.

super-low interest rates had something to do with real estate going up. actually they had everything to do with real estate going up. and monetization of our trade deficits by china and japan, and the resultant flow back into u.s. fixed income markets had everything to do with helping keep longer rates down.

oil prices rising are not a coincidence that just happens to be affecting our economy. oil, along with other commodities, has been the new target of all that "money sitting around." and i'm not sure what the difference is between saying there has been a lot of liquidity in the system, and saying we happen to have a lot of "money sitting around."

from a piece i read elsewhere: "April and May's parabolic leaps in metal prices were driven by hedge funds awash in cheap,
Japanese-supplied liquidity. That the fuel for those correlated liftoffs was yen borrowed at
near-zero rates was proved first, when the Bank of Japan slashed monetary growth to get itself
ready for the eventual imposition of interest charges on borrowings, and commodity futures
collapsed, and second, when the BOJ blinked, and made a sudden, large-scale liquidity
injection as markets were being roiled across the world, and spirited rallies in commodity
futures and in share prices of commodity producers ensued."

my interest in starting this thread is to have a conversation about why the dollar has strengthened of late, and whether it will continue to do so or, as i believe more likely, start going down with u.s. asset markets. this question has practical importance for me as i have about a quarter of my assets exposed to non-u.s. dollar currencies, and i'm trying to figure out whether to change that exposure, and in what direction.

[btw blaze, if you don't think there will be capitulation, why are you holding so much cash?]

[zmas28]

Re: the dollar

I've read some articles that suggest we may be in for a short term rally in the dollar, within a longer term, secular bear market. A couple of reasons:
(a) with global reduction in liquidity, there has been an increase in the risk premium and a "flight to quality", & US dollar denominated assets still seem to represent less risk (b) the Japanese & Chinese CB's, though possibly more cautious, are still willing to purchase US treasuries, or at least are unwilling to do anything that might cause a precipitous fall in the dollar value.
Another factor that might play into the flight to quality & risk reduction is the backdrop of increasing geopolitical turmoil.
Personally, I would have thought that as the Fed reached the end of the tightening cycle, and other CB's like Japan, ECB & China started to tighten, that would be bearish for the dollar. Perhaps the market feels that the Fed still has a ways to go.
Another reason, from a contrarian perspective, is that everyone now seems to be bearish on the dollar, which might signify a short term bottom.

[jk]

Re: the dollar

I've read some articles that suggest we may be in for a short term rally in the dollar, within a longer term, secular bear market. A couple of reasons:
(a) with global reduction in liquidity, there has been an increase in the risk premium and a "flight to quality", & US dollar denominated assets still seem to represent less risk (b) the Japanese & Chinese CB's, though possibly more cautious, are still willing to purchase US treasuries, or at least are unwilling to do anything that might cause a precipitous fall in the dollar value.
Another factor that might play into the flight to quality & risk reduction is the backdrop of increasing geopolitical turmoil.
Personally, I would have thought that as the Fed reached the end of the tightening cycle, and other CB's like Japan, ECB & China started to tighten, that would be bearish for the dollar. Perhaps the market feels that the Fed still has a ways to go.
Another reason, from a contrarian perspective, is that everyone now seems to be bearish on the dollar, which might signify a short term bottom.

those things make sense, except that the "flight to quality" argument contradicts the idea that everyone is bearish on the dollar. of course different players may hold those disparate views. i would imagine that more conservative - backward-looking - money sees the dollar as safety, more speculative - forward-looking - money would be bearish.

what then will make the conservative money, the holders of u.s. dollar based assets [esp. fixed income], want to take their money out of the u.s.? in my first post in this thread i spoke of u.s. domiciled investors repatriating high-risk investments, like em equities and commodities, too, i should add. but what will make both domestic and foreign investors in treasuries and agency debt want to move to another currency?

i suppose that when the fed stops tightening [or, more extremely, when it starts loosening] would be a natural time for that. any other nominations?

[Jim Nickerson]

Re: the dollar

jk,

I don't personally know squat, but looking at what some others are conjecturing and based on that, below is how I am playing it.

Volkmar Hable references the strength of the US treasury buying to reflect what is (will) happening. http://www.safehaven.com/article-5548.htm

Hable writes in terms of the EUR action that from here he suggests the US$ may rise and the EUR could decrease to a target of 124--that translates into a 1.97% decline in the EURO, and using the inverse percentage applied to the US$ index it could rally to 87.80 (James West in truncated comments http://www.financialsense.com/fsu/ed...2006/0715.html vaguely supports this by stating he expects the US$ to exceed it June high which was 87.05. You might look also at his previous week's note. http://www.financialsense.com/fsu/ed...2006/0708.html

Back to Hable. If the EUR doesn't decline, he would sell US$ when EUR crosses 128.60, EUR was 126.49 7/14/06. 128.60 EUR is 1.67% above Friday's close. He suggests if the EUR rallys either now or after testing 124, its initial upside target is 130 (2.77% above Friday's close). He suggests the EUR could reach 135 which he thinks is a sustainable exchange level (6.73% above Friday's close). He conjectures the peak for the EUR is 150 a level he sees as unsustainable. Were the EUR to reach 150 that is 18.59% above Friday's close. At 150, he considers that to be a "dollar crisis" and would be "a clear and screaming buy for the greenback." 150 EUR, using inverse percentages (which isn't truly a 1:1 relationship), would put the US$ Index at about 70.

I currently am long the CA$ (FXC) and the EUR (FXE) with a small loss between the two. I will buy more FXE if EUR reaches <=125, and also get back into RYWBX. I personally think the EUR will drop back to 125 or less from where it is now, but my feeling is totally the result of Hable and West's conjectures.

[jk]

Re: the dollar

jk,

I don't personally know squat, but looking at what some others are conjecturing and based on that, below is how I am playing it.

Volkmar Hable references the strength of the US treasury buying to reflect what is (will) happening. http://www.safehaven.com/article-5548.htm

Hable writes in terms of the EUR action that from here he suggests the US$ may rise and the EUR could decrease to a target of 124--that translates into a 1.97% decline in the EURO, and using the inverse percentage applied to the US$ index it could rally to 87.80 (James West in truncated comments http://www.financialsense.com/fsu/ed...2006/0715.html vaguely supports this by stating he expects the US$ to exceed it June high which was 87.05. You might look also at his previous week's note. http://www.financialsense.com/fsu/ed...2006/0708.html

Back to Hable. If the EUR doesn't decline, he would sell US$ when EUR crosses 128.60, EUR was 126.49 7/14/06. 128.60 EUR is 1.67% above Friday's close. He suggests if the EUR rallys either now or after testing 124, its initial upside target is 130 (2.77% above Friday's close). He suggests the EUR could reach 135 which he thinks is a sustainable exchange level (6.73% above Friday's close). He conjectures the peak for the EUR is 150 a level he sees as unsustainable. Were the EUR to reach 150 that is 18.59% above Friday's close. At 150, he considers that to be a "dollar crisis" and would be "a clear and screaming buy for the greenback." 150 EUR, using inverse percentages (which isn't truly a 1:1 relationship), would put the US$ Index at about 70.

I currently am long the CA$ (FXC) and the EUR (FXE) with a small loss between the two. I will buy more FXE if EUR reaches <=125, and also get back into RYWBX. I personally think the EUR will drop back to 125 or less from where it is now, but my feeling is totally the result of Hable and West's conjectures.

thanks jim. i had already looked at hable [on your earlier recommendation - thanks for that too]. i looked at west and back to hable and realize that i'm trying to do a fundamental kind of analysis on every squiggle and it just doesn't work. i suppose hable's statement [that the dollar's movement in the immediate future will depend on flows into u.s. treasuries] comes closest to a fundamental kind of analysis, and harkens back to this idea of the dollar, and treasuries, as "safety." but west's chart of the cot data just looks like the commercials fading short-term moves, so i figure it falls into technical self-fulfilling prophecies -- i.e. if enough people are following the same charts certain moves will usually [not always] be predictable.

i'm not as much of a trader as you are, so i guess i'll sit with my 26% non-dollar exposure and wait. i am thinking of using another vehicle instead of rywbx, though, because of the pernicious effects of its inverse leverage when the dollar isn't trending.