Greenspan Talks Up the Dollar; Mr. Yen Forecasts Possible "Plunge"

While the G-7 may shy away from trying to bolster the dollar, the newly bold Alan Greenspan isn’t afraid to step into the breach. From Bloomberg:

Former Federal Reserve Chairman Alan Greenspan doesn’t expect a rapid decline in the dollar should nations sell more of their holdings of U.S. Treasuries, according to people attending a forum in Seoul today.

“When asked whether there will be a plunge in the dollar in case China offloads its U.S. Treasury holdings, Greenspan said it’s already-known information that won’t trigger any rapid drop in the U.S. dollar,” said Kong Dong Rak, a fixed-income analyst with Hana Daetoo Securities Co., who attended the presentation. “His view is that markets are clever enough not to overreact.”…..

Kim Gyung Rok, chief investment officer of Mirae Asset Investment Management Co. in Seoul, also confirmed Greenspan’s remarks on the dollar. “Foreign-exchange markets have already priced in bit by bit” the possibility of an unloading of U.S. Treasuries, he said.

Greenspan is “of the opinion that holdings of foreign- exchange reserves tend not to be moved easily,” Kim said.

It would be better for all of us if Greenspan were correct, but the IMF said in August and repeated yesterday that the dollar was overvalued. If markets were as efficient as he believes, they wouldn’t have had to say it twice.

An update as of 3:00 AM: Bloomberg gives us a dire forecast from Eisuke Sakakibara, aka “Mr. Yen,” who foretells that the dollar could go into free fall in 2008 if US growth falls too far:

The dollar may “plunge” in 2008, prompting the U.S., the European Union and Japan to intervene in foreign exchange markets, said Eisuke Sakakibara, Japan’s former top currency official.

U.S. economic growth may slow to less than 1 percent next year as losses on loans to homeowners with poor credit erode consumer spending and bank earnings, he said in an interview today in Tokyo. Sakakibara, 66, was dubbed “Mr. Yen” because of his ability to influence the currency market during his 1997 to 1999 tenure at the Ministry of Finance.

“Should growth fall below 1 percent, we could see a plunge in the dollar,” said Sakakibara, who is currently a professor at Tokyo’s Waseda University. “Some form of intervention would be necessary to stop it, and that would require coordinated effort from all three major economies.”….

The dollar fell to $1.4232 against the euro at 3:03 p.m. in Tokyo from $1.4208 late yesterday and approached a record low of $1.4283 reached on Oct. 1. It bought 116.56 yen from 116.68. The U.S. currency may fall beyond $1.45 per euro in 2008 and even further depending on the U.S. economy’s slowdown, Sakakibara said.

The International Monetary Fund yesterday cut its forecast for 2008 expansion in the world’s biggest economy to 1.9 percent from 2.8 percent. “There are serious risks ahead” because of the financial market turmoil, Simon Johnson, the IMF’s chief economist, said at a press conference in Washington…..

The yen may approach 100 against the dollar next year as sentiment worsens for the U.S. currency, Sakakibara said. Japan’s currency climbed as high as 111.61 on Aug. 17, the strongest in more than a year.

The Federal Reserve may follow its Sept. 18 interest rate reduction with a further cut before the end of the year to stem fallout from subprime mortgage defaults, Sakakibara said. It is likely to keep the target for the overnight lending rate between banks on hold at 4.75 percent on Oct. 31, he said.

“There’s more risk for the yen to strengthen next year, as the dollar’s problems grow,” Sakakibara said.

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  1. a

    I think the fair value of the yen vs dollar is south of 100, so I don’t think any such “collapse” should be reason for complaining.

  2. Anonymous

    Oh this is just too funny….

    So let me understand this correctly: if a headline just flashed across Bloomberg that China’s central bank announced they are going to sell $100 billion in US Treasuries and convert the money out of the US dollar, the markets would just shrug this off?

    Does Greenspan actually believe his own BS?

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