Another negative for the dollar: it is starting to displace the yen as the funding currency for the carry trade. As most readers probably know, the carry trade is when one borrows in one market that offers low borrowing costs and invest in one with high yields. It is easy money, but comes with the […]
Read more...Readers are likely familiar with the general premise that trade deficits, like the one the US has been running for a very long time, need to be matched by surpluses in the capital account, meaning in colloquial terms that our trade deficits are funded by foreign investment of various sorts, be it in Treasury securities, […]
Read more...China is suffering from rising inflation, as well as a runaway stock market bubble, both side effects of its rapidly growing foreign exchange reserves. But rather than raise interest rates, which would rein in price growth but also increase the price of the yuan, the Chinese are instead engaging in extreme measures to combat domestic […]
Read more...Due to a mishap, some supposedly closed-door OPEC discussions were aired. Perhaps the most telling remark was the Saudi insistence that the dollar not even be mentioned in OPEC communiques, since any indication that the member states were talking about it would drive the currency lower. Nevertheless, as we discuss below, OPEC members are keenly […]
Read more...America is getting more support in its efforts to pressure China to let the yuan appreciate. Bloomberg reports than the Bank of England’s governor Mervyn King is lining up with Jean-Claude Trichet and Hank Paulson: Bank of England Governor Mervyn King is joining Jean-Claude Trichet and Henry Paulson to demand that China allow the yuan […]
Read more...John Dizard of the Financial Times has a fascinating article in which he goes to the blue-chip art auctions to get a reading of the mood of the Seriously Rich. And what he finds is not encouraging. Even the wealthy are rattled. He also argues that the Euro is overbought and will trade down by […]
Read more...In a sign of increasing desperation, some central banks are imposing currency controls in an effort to arrest the dollar’s decline. Oddly, none of them seem to be taking the most direct measure, which would be to sell their own currency. This may be due to the fact that traditionally, the job of trying to […]
Read more...Nothing like a sobering forecast to focus the mind on a Monday morning. As readers may recall, I was deeply concerned early this year about excessive leverage, asset bubbles in many different markets, and complacency about risk. But it is one thing to know that things are likely to turn out badly, quite another to […]
Read more...Oh, we are in for a wild ride. The long-anticipated and much delayed unwind of the carry trade appears to be underway, due to credit market fears. For those new to the concept, the carry trade involves borrowing where interest rates are low (typically in a cheap currency, like the yen, where interest rates are […]
Read more...A comment in the Financial Times, “The world’s currency could be a US problem,” by Krishna Guha, does a good job of setting forth various scenarios for the dollar’s future course, and discusses the implications for the US and other economies. The piece give a nice summary of the background of the problem, and concludes […]
Read more...I managed to miss this very good post, “Exchange Rates: There is a Better Way,” by Thomas Palley last week (it was also picked up by the Guardian) but since it does not appear to have been discussed in the usual suspect economics blogs, I though I would call readers’ attention to it. Before you […]
Read more...Robert Rubin spoke out against policies that weaken dollar, from the commonsense perspective that a cheap dollar lowers the US standard of living. That’s a bit simplistic, since the impact of a weak currency on citizens depends on how dependent a country is on imports, and critically, to what degree domestic goods could substitute for […]
Read more...Despite the widely-held view that the Fed will lower the Federal funds rate another 25 basis points this Halloween, some continue to argue against further reductions. We’ve taken that position here before, and will recap some of the reasons. The 50 basis point cut in September was a pre-emptive strike, based not on evidence of […]
Read more...At Vox EU, Shang-Jin Wei argues in “Don’t over-sell the benefits of a change in the Chinese exchange rate policy,” that the upside of an end to the dirty float of the yuan (or as he prefers, the renminbi), has been overstated. His analysis is elegant and persuasive, and the piece is colorfully written as […]
Read more...Whoever wrote the headline to former Treasury Secretary, now Harvard professor Larry Summers’ latest comment in the Financial Times did him a disservice. The lead-in, “How American must handle the falling dollar,” implies that Summers has a specific, hard-headed program. Instead, the piece offers a succinct and subtle analysis of what is wrong with our […]
Read more...