Does this mean $ demand will remain strong?

[Mega]

http://www.telegraph.co.uk/finance/f...-shortage.html

?
Mike

[Supercilious]

Re: Does this mean $ demand will remain strong?

http://www.telegraph.co.uk/finance/f...-shortage.html

?
Mike

Probably yes, at least short term.

[Starving Steve]

Re: Does this mean $ demand will remain strong?

At first glance at this very interesting newspaper article, I think the writer may have a point: If there is a shortage of dollars in the funding banks in Europe, then the dollar is fine, and gold is going to come down a bit more.

This is exactly what happened after the 1980 peak in gold. The dollar got scarce.

Watch the Fed: They are keeping the CIRCULATING money supply very tight. They will have to drain the bail-out funds from the banks in time, and if they do, that will keep the dollar strong. If they don't, the dollar is toast.

My guess is that Bernanke will drain the bail-out money, but who knows? Some gold now for insurance would still be appropriate.

[ASH]

Re: Does this mean $ demand will remain strong?

Probably yes, at least short term.

The wording was a little confusing. This paragraph talks about long positions in US dollars, funded by short-term borrowing in European currencies:

The BIS said European and British banks have relied on an “unstable” source of funding, borrowing in their local currencies to finance “long positions in US dollars”. Much of this has to be rolled over in short-term debt markets. The currency mismatch has become a potential risk for banks as the dollar continues to climb against the euro and Swiss franc, and especially sterling and Sweden’s krona.

However, these paragraphs indicate that the dollar positions are actually net short:

British banks have borrowed some $800bn in sterling to make dollar investments and loans. By mid-2007 they had accumulated what amounted to a $300bn net “short position” on the US dollar. The latest BIS data up to the third quarter of 2008 shows that this exposure has been trimmed by “deleveraging” but it still largely hanging over the UK financial institutions.

Swiss banks had a funding gap of $300bn at the onset of the credit crunch, an extremely high figure relative to Swiss GDP. German banks were $300bn short, and Dutch banks were $150bn short. Belgian and French banks were neutral.

If these banks had borrowed in their own currencies to invest in dollar-denominated assets, they would be long dollars, and possibly forced to liquidate those positions if they were unable to roll over the short-term funding in their home currencies. However, if they used that borrowing to make dollar-denominated loans, then I expect the shift in exchange rate would create capitalization problems and demand for dollars to back their dollar loans. Is that what this means? Otherwise, it's hard to square the statement that the short-term borrowing was in European currencies, yet the demand is for dollars.

[loweyecue]

Re: Does this mean $ demand will remain strong?

The wording was a little confusing. This paragraph talks about long positions in US dollars, funded by short-term borrowing in European currencies:

The BIS said European and British banks have relied on an “unstable” source of funding, borrowing in their local currencies to finance “long positions in US dollars”. Much of this has to be rolled over in short-term debt markets. The currency mismatch has become a potential risk for banks as the dollar continues to climb against the euro and Swiss franc, and especially sterling and Sweden’s krona.

However, these paragraphs indicate that the dollar positions are actually net short:

British banks have borrowed some $800bn in sterling to make dollar investments and loans. By mid-2007 they had accumulated what amounted to a $300bn net “short position” on the US dollar. The latest BIS data up to the third quarter of 2008 shows that this exposure has been trimmed by “deleveraging” but it still largely hanging over the UK financial institutions.

Swiss banks had a funding gap of $300bn at the onset of the credit crunch, an extremely high figure relative to Swiss GDP. German banks were $300bn short, and Dutch banks were $150bn short. Belgian and French banks were neutral.

If these banks had borrowed in their own currencies to invest in dollar-denominated assets, they would be long dollars, and possibly forced to liquidate those positions if they were unable to roll over the short-term funding in their home currencies. However, if they used that borrowing to make dollar-denominated loans, then I expect the shift in exchange rate would create capitalization problems and demand for dollars to back their dollar loans. Is that what this means? Otherwise, it's hard to square the statement that the short-term borrowing was in European currencies, yet the demand is for dollars.

I have the same confusion with this article. How does a long position in Dollars translate to a shortage of the same?

[kartius919]

Re: Does this mean $ demand will remain strong?

The collapse after the 1980 peek was due to Volker raising rates to 18%. It pulled capital away from the economy and the gold market to treasuries thus crashing both. Can't raise interest rates now because our outstanding debts are way too high. I agree with Ash, the article is ambiguous. Tried accessing the original BIS article but it said the file was corrupt so not sure which. Assuming that banks are short dollars, then further strength would cause an unwinding of those positions. If the dollar weakens, then those positions will not have to be unwound. Short term it is dollar supportive, mid to long term it may be insignificant as the deluge of dollars sitting across the globe vastly outnumber two trillion. Our budget deficit this year is 99.9999% over 2 trillion.

[Dridamse]

Re: Does this mean $ demand will remain strong?

I hope this link works

http://www.bis.org/publ/qtrpdf/r_qt0903f.pdf

Best Regards

[Starving Steve]

Re: Does this mean $ demand will remain strong?

The banks have lent U.S. dollars out on development projects worldwide, and those dollars have to be paid-back to the banks with interest. Dollars now are in short supply.

The trillions in TARP funds and bail-out funds are to banks in the U.S, and those trillions have not yet been released into circulation. From what I can tell, if a bank gets a bail-out, it takes the money and puts it back into the U.S. Treasury or the Federal Reserve to earn interest.

The bail-outs are a book-keeping scam. The banks get free money from the Fed to earn interest with and to make their books look profitable and kosher. This is federal aid ( welfare ) to the banks.

[Guest]

Re: Does this mean $ demand will remain strong?

The US dollar is Dooomed I tell you! Doooooooooomed! (channelling Peter Schiff, and the Genghis-Khan-savage marauding barbarian hordes of dollar-dooom-meisters). Mark my solemn words, it is dommmmed! :rolleyes:

[ASH]

Re: Does this mean $ demand will remain strong?

I have the same confusion with this article. How does a long position in Dollars translate to a shortage of the same?

I'm thinking the issue is that European banks are not the same thing as Europe. If European banks borrowed in European currencies, bought dollars, and then loaned the dollars -- presumably with leverage -- then those banks would indeed be long dollar-denominated assets (the loans that are due to be repaid to them in dollars). However, because of the leverage, there would be more dollar-denominated debt in the European countries where the loans were made, than dollar assets, which is how the banks could be long dollars, but the countries themselves net short.

[rjwjr]

Re: Does this mean $ demand will remain strong?

I hope this link works

http://www.bis.org/publ/qtrpdf/r_qt0903f.pdf

Best Regards

Thanks for sharing, although much of the information is above my head. What I can't decipher from this is the answer to the question; So is the need for dollars by non-US banks now over since the Fed has stepped-up?

The original post, and the original article, asked and implied if this (the non-US need for dollars) is the reason (or at least one reason) why the dollar remains strong. If this is a or the reason, and it certainly seems plausible, then is the foreign dollar requirement now satisfied? If yes, is the consensus that the dollar will now start to weaken?

[Jim Nickerson]

Re: Does this mean $ demand will remain strong?

Thanks for sharing, although much of the information is above my head. What I can't decipher from this is the answer to the question; So is the need for dollars by non-US banks now over since the Fed has stepped-up?

The original post, and the original article, asked and implied if this (the non-US need for dollars) is the reason (or at least one reason) why the dollar remains strong. If this is a or the reason, and it certainly seems plausible, then is the foreign dollar requirement now satisfied? If yes, is the consensus that the dollar will now start to weaken?

If you believe the article, the answer is no, the US$ is not going to weaken soon.

Simon Derrick, currency chief at the Bank of New York Mellon, said the implications are obvious. “The global bullion of the last eight years was funded on dollar balance sheets, so the capital destruction we’re seeing leaves banks starved for dollars. Dollar is clearly going to appreciate a lot further,” he said.

[Supercilious]

Re: Does this mean $ demand will remain strong?

The wording was a little confusing. This paragraph talks about long positions in US dollars, funded by short-term borrowing in European currencies:
[...]
If these banks had borrowed in their own currencies to invest in dollar-denominated assets, they would be long dollars, and possibly forced to liquidate those positions if they were unable to roll over the short-term funding in their home currencies. However, if they used that borrowing to make dollar-denominated loans, then I expect the shift in exchange rate would create capitalization problems and demand for dollars to back their dollar loans. Is that what this means? Otherwise, it's hard to square the statement that the short-term borrowing was in European currencies, yet the demand is for dollars.

The short positions are derived from the dynamics of their liabilities roll-over on a deflationary background. I'll try to put it in simple terms. Let's say I'm a bank and Lukester needs a $1000 loan in dollars to buy a new safe box for his gold. I arrange for a one year 5% loan for him, but I don't have enough capital. Luckily you have $1000 you want to place in a 2% one month CD with my bank (you are essentially a money market equivalent).

I as a smart european banker, believe in SIV type leverage and I get your money and give it to Lukester for one year making money on the interest differential. When the month ends, I have to return your $1000, but I can't recall Lukester loan. Therefore I get first another $1004 from Mega (on another one month CD) in order to pay you. If I cannot find quick enough someone else to give me money, I need to bridge the loan rollover with my own capital. So far, we have a maturity mismatch hit by a liquidity crunch. I'm in trouble although the loan given to Lukester is a good quality asset and was well collateralized.

The problem is what is happening when Mega has his money in pounds not in dollars and I can't find anybody else to give me dollars?

I take the corresponding amount of pounds and sell them to get dollars for the rollover. Here the maturity mismatch is compounded by the forex mismatch. In such a case massive short term borrowing by the European banks in domestic currencies in order to finance long term dollar loans, can make things extremely messier and can put a downward pressure on the domestic currencies especially if it involves a change in the currency composition of the short term liabilities. This can generate a spiral default effect as it happens in a few East European countries.

A lot of folks got cheap mortgage loans in yen (or dollars) and their national currencies fell. The yen loans become more expensive and the short term rollover of yen liabilities from the domestic market, puts further local pressure, more chance of default ... and so on.

These dollar short positions is just the result of the fact that european banks are very leveraged and there is a dollar liquidity crunch. Add to that bad loans and shrinking profits and , voila ,... they need a gazillion dollars to convert back from semi-SIV's into the normal banks. You can consider that some Europeans have experienced a partial run on the banks, but instead deposits vanishing, the short term dollar liquidity is vanishing.

[ASH]

Re: Does this mean $ demand will remain strong?

I'll try to put it in simple terms...

Thank you!

[blazespinnaker]

Re: Does this mean $ demand will remain strong?

The real question is, how do we get updated stats on current liabilities?

No doubt those numbers will tell us a pretty interesting story on the direction of the USD..