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Has the dollar peaked?

by Brad Setser
December 12, 2008

For much of the most recent phase of the rolling global crisis, the dollar and the yen rose against the euro, the pound and most emerging market currencies.

Some of that was a reaction to the euro’s extreme strength going in to the crisis; a $1.55 euro amid a European recession would have made life very uncomfortable for many European manufacturers.

But some of the dollar’s rise also reflected a global scramble for dollar liquidity, whether as a safe have (compared say to the ruble, the dollar looks good .. ) or to repay dollar-denominated debts. John Authers of the FT:

On a trade-weighted basis, the dollar rose 22.7 per cent from July until its peak last month. This was not, evidently, due to any great strength in the US economy. Instead it was largely a perverse phenomenon – as traders sold assets to pay down debts (deleveraging), they often had to buy dollars. So as the crisis intensified, so the dollar strengthened. The only exception to this was the yen, which does even better than the dollar when investors are anxious.

Over the past two days, though, the dollar has fallen against both the euro and the yen.

The US trade data surprised on the downside — and while it is far too soon for the dollar’s recent rise to really have an impact on the trade data, the rise in the deficit perhaps did remind the market that over time a rising dollar would tend to maintain the still large trade deficit not bring it down. Macro man was far more surprised by the rise in the non-oil deficit than I was; it was always going to be race down between imports and exports. And last month exports fell by more …

The collapse of Madoff’s investment fund presumably hasn’t done wonders for the United States image as a financial safe haven either. His stable, predictable returns turned proved too good to be true. See Cassandra (hat tip Naked Capitalism).

And the apparent collapse of Detroit’s bailout hasn’t helped.

The risk that the much of the US auto sector might be pushed not just into Chapter 11 (I sure hope they have contingency plans … so any restructuring is fast) but could spiral into liquidation cannot be good for the dollar. Ford, GM and Chrysler still do make significant numbers of vehicles for sale in the US. If a couple of them end up liquidating, the US will either end up buying fewer cars or importing more cars. And over the longer-term, a weaker dollar would be needed to induce European and Japanese manufacturers (or any new electric car start-up) to produce vehicles for the US market in the US — or to generate the additional exports the US would need to pay for additional automobile imports.

Many emerging market currencies have slid too. But at least one emerging currency also did reasonably well this week: Korea’s won.

Korea has secured $48 billion in swap lines from Japan and China, adding to the $30 billion swap line it now has with the US.

I rather suspect that when the network of Asian swap lines was first created, Korea viewed itself as a likely lender to weaker Asian economies not a likely borrower. But times have changed. Korea has managed to secure more cash through swaps this time around than it got from the IMF last time.

China and Japan weren’t acting entirely altruistically though. The large northeast Asian economies don’t trade among themselves to the same degree that the large European economies do. But they do compete against each other in global markets. Won weakness wasn’t good for either Chinese or Japanese exporters. Pulling the won back up consequently will help reduce the yuan and the yen’s effective strength.

The fact that Korea was able to obtain large quantities of dollars from others in Asia — and that it did so with having to turn to the IMF — illustrates how much the world has changed.

At the same time, it is striking to me that the US provided more than either China or Japan and, well, the US doesn’t have many formal foreign currency reserves. So long as the world needs dollars in pinch, the US doesn’t need to hold all that many foreign currency reserves. The Fed has an unlimited ability to provide dollars against won (or other) collateral if it decides too.

And that has meant that the US has played a far more central role managing the global aspects of this crisis than I would have expected six months ago —

At the same time, the US isn’t the world’s only large source of dollar liquidity. Korea has obtained almost $50 billion — far more than it ever actually borrowed from the IMF and the World Bank in 1997 and 1998 — without going to Washington. And that is an important change.

UPDATE: The Treasury isn’t going to let Detroit fail, at least not just yet. The TARP will undergo yet another incarnation.


  • Posted by DJC

    Everyone knows that the Great Depression followed the “Roaring Twenties”. But how many Americans know that the easy credit and loose lending of the Twenties was what caused the Great Depression?

    Japan’s “lost decade” of deflation was also mainly caused by a credit bubble. And the greatest financial crash of all time – the crash of 1340 in Venice, Italy, which brought on the Dark Ages – was similarly caused by too much credit.

    The fact that crashes follow too-easy expansion of credit is so predictable that those in the know – like the Austrian school of economics – uses it to predict upcoming crashes.

    Will we ever learn? There can never be a “new era” where a horrible crash does not follow limitless credit expansion like night follows day. Paulson and Bernanke either don’t know about our economic history or pretend they don’t know.

    The law of booms and busts should be taught to every Economist in school. Unless we learn – as a culture – to moderate our booms, we will always be subject to cruel busts.

    And since the Federal Reserve has become the chief bubble creator in modern times, we should abolish the Fed.

  • Posted by Howard Richman


    Everything you wrote in this posting is true. However, I think the fall in the dollar is just temporary. The mercantilist countries will be stepping-up their currency interventions while more and more US manufacturing companies, starting with Detroit, go bankrupt. They won’t let the dollar fall until they are done stealing market share from US businesses. When the dollar falls, it will collapse.

    Like you (and unlike Macro Man) I was not at all surprised by October’s trade statistics. In fact, they confirmed my view of what is currently happening:

    (1) US imports are falling because US consumers are borrowed out.

    (2) US exports are falling because investment is starting to collapse worldwide.

    Howard Richman

  • Posted by Rajesh

    The dollar has peaked if you believe that Euro interest rates have hit bottom and the Euro-area economy will begin growing again without significant demand for products from the rest of the world or stimulus from European governments. With both China and the U.S. exporting deflation, the 2.5% interest rates look very restrictive.

  • Posted by Horin

    Hello Brad,

    “Won weakness wasn’t good for either Chinese or Japanese exporters. Pulling the won back up consequently will help reduce the yuan and the yen’s effective strength.”

    Three countries – Japan, Korea, and China – cut the currency swap deal after the Asian financial crisis to prevent a future one from having the full-fledged devastating effect on the region. Japan was at the time trying to create the “Asian IMF” called AMF to stop the future crisis, but the US crashed the idea because it feared losing the leading financial position in the region upon the creation of AMF. Of course, I’m sure that no country including the US is truly altruistic to help each other, but the currency swap deal among three Asian nations has been invented not to repeat the Asian financial crisis, thus stabilizing the whole region. In that sense, the swap deal is likened to the “mini-IMF” in the region. All stories in the North-East Asia cannot be explained by the tug-of-war among nations on export or currency matters.

  • Posted by bena gyerek

    i think a lot of the euro strength is to do with a perception that germany is forcing the rest of the eurozone into deflationary policies. earlier this week trichet indicated a more gradualist approach to rate cuts than markets expected. add to that the posturing by steinbruck about fiscal rectitude, and it suggests that bunds are a much safer bet than treasuries.

    the dollar rally during the crisis was clearly technical (dollar funding squeeze) as well flight to quality. however the technical driver should have been eliminated by the unlimited cross currency swaps extended between the fed and other major central banks.

    however, i think rates expectations were very important in explaining the dollar’s recent holding of its value against eur in 1.25-1.30 range. i mean, why put in place new carry trades if you know that (a) dollar rates cannot go lower, and (b) rates in other countries like eurozone almost certainly will go lower?

    now that people expect euroland to be more frugal, i think that going forwards the carry trade will start to weigh down usd more and mroe (and even more so gbp). in that sense we have reached a turning point. asian exporters will be happy for their reference currency (usd) to weaken against their biggest export market (eur). commodity exporters’ dollar reserves are going into reverse.

    however, i think there is also now the risk of a catastrophic collapse in the dollar. if the likes of taiwan or korea take the view that eur/usd rebalancing back towards 1.60 is inevitable and desirable, why take the hit on your dollar reserves? why not rebalance now into eur? the treasury bubble merely leverages this risk (and upside on treasuries is clearly near its technical ceiling now).

    once one or two central banks head for the door, how many will run after them?

  • Posted by DJC

    Charts Predict: The Start of a Big Dollar Slump

    The dollar is teetering just below a critical level versus the euro that could send it nearly 40 percent lower, Phil Roberts, technical analyst at Barclays Capital, told CNBC.

    Over the last few months the dollar has made a dramatic surge against the European currency as investors welcomed aggressive interest-rate cuts from the Federal Reserve. The European Central Bank kept rates relatively high as the economic slowdown started to severely drag on the economy.

  • Posted by bena gyerek
  • Posted by DJC

    The World Bank once again demonstrates itself as stooge for US Treasury Dept. Does whatever Neo-liberal US policy prescription formulated by the US Treasury Dept always have to be implemented verbatim by the IMF and World Bank? IMF economic policies have impoverished hundreds of millions of developing world families across Southeast Asia, Latin America, and Africa while enriching politically connected Wall Street banksters. How about the US Treasury/IMF minding their own damn business instead of interfering in the internal affairs of the sovereign Chinese government. From Bloomberg,

    “China’s growth has slowed for five quarters. The economy expanded 9 percent in the third quarter, the least in five years. The World Bank forecasts the economy will expand 7.5 percent next year, which would be the slowest pace in almost two decades.

    Policy makers shouldn’t use the nation’s exchange rate to boost exports, David Dollar, the World Bank’s country director for China, said today. Exports are falling “because of shrinking global demand and the exchange rate is not the problem,” he said at a conference in Beijing.

  • Posted by DJC

    Declining U.S. orders already have contributed to the closure of at least 3,600 toy factories since the beginning of 2008, according to the Chinese government, leaving hundreds of thousands of Chinese workers suddenly out of work in this sector alone. Some of the shutdowns have triggered violent protests, a situation that could worsen if the Western recession drags on through 2009, as many economists are predicting.

    “Unemployment in China could deprive a lot of people of their lifeline,” says Hu Xindou, an economics professor at the Beijing Institute of Technology. “So it could trigger social instability or even shake the rule of the Communist party.”

    The labor-intensive industries making things like toys, shoes and clothing generate millions of jobs for its rapidly growing workforce. The closures have left many migrants with no work.

    Each day, thousands of other migrants in Guangdong and other coastal provinces board trains and buses for their home villages, leaving earlier than normal for the Chinese New Year, which begins Jan. 26. When and if they will return is anyone’s guess.

    In the short term, the exodus of unemployed workers eases pressure in Guangdong and other manufacturing centers. Longer term, however, it hurts families living in the poorest parts of China, who receive money from migrant workers. That raises the prospect that the protests and violence in the manufacturing regions could spread to the interior, many China experts say.

    “It’s a potentially scary scenario,” said Lawrence Delson, who teaches China business courses at New York University. “If many of these migrant workers go home, what happens to the flow of money back to the inland provinces? … There is a deepening division between the haves and the have-nots … raising the specter of social unrest.”

  • Posted by bsetser

    Horin — I don’t think our arguments are actually different. The main way a financial crisis ends up impacting others in Asia is often through abrupt currency moves and big swings in trade flows. I don’t think Chinese banks say have a lot of direct exposure to Korea.

    Your point that Asia wanted to rely more on self-help and less on the imf is no doubt true, and the fact that Japan, Korea and China were able to cooperation to do this despite their long-standing historical differences is also important. Clearly Korea preferred Asian swaps to the IMF’s new no-conditionality short-term facility

  • Posted by Global Monopoly

    @ Dr. Richman:
    I think you’re right in saying that purchases of dollar debts by countries like China and India are likely to continue till they re balance export activities. I would also generally think any country with a labor intensive export sector with a big share of US exports would be in the same situation.

  • Posted by Global Monopoly

    @Brad: any related opinions on the currency composition of current/future forex reserves?

  • Posted by DJC

    US Dollar Hegemony and a Profligate Congress: A Bad Combination

    The adoption of the dollar as the Reserve currency since World War II has allowed the U.S. to deficit spend and not incur the normal bad economic affects from doing so, up to now. To get a handle on this consider China.

    China makes all the iPods and a lot of other things too. It has to hold a huge reserve of dollars to clear foreign exchange transactions and it also converts some of the country’s savings into large purchases of U.S. Treasury securities. The United States printed pieces of paper and issued U.S. Treasury bonds to China, and received real goods and services in return. I would argue that the build up of dollars for reserves by China that is stable going forward represents money the U.S. Congress can spend “for free”. Multiply this by all the other countries in the world that have to have the reserve currency and you begin to see how U.S. deficit spending can be sustained.

    Lehrman and Meuller, the authors of this article, argue that the U.S. is going to have bad affects from being the Reserve currency and that it should give up that role. But after a long time of receiving real goods and services for pieces of fiat paper, it seems like giving up being the Reserve currency might be painful in the short run.

  • Posted by DJC

    The Best and the Brightest Have Led America Off a Cliff
    by Chris Hedges

    The multiple failures that beset the country, from our mismanaged economy to our shredded constitutional rights to our lack of universal health care to our imperial debacles in the Middle East, can be laid at the feet of our elite universities. Harvard, Yale, Princeton and Stanford, along with most other elite schools, do a poor job educating students to think. They focus instead, through the filter of standardized tests, enrichment activities, advanced-placement classes, high-priced tutors, swanky private schools and blind deference to all authority, on creating hordes of competent systems managers. The collapse of the country runs in a direct line from the manicured quadrangles and halls in places like Cambridge, Mass., Princeton, N.J., and New Haven, Conn., to the financial and political centers of power.

    There?s a certain kind of student at these schools who falls in love with the mystique and prestige of his own education,” said Elyse Graham, whom I taught at Princeton and who is now doing graduate work at Yale. “This is the guy who treats his time at Princeton as a scavenger hunt for Princetoniana and Princeton nostalgia: How many famous professors can I collect? And so on. And he comes away not only with all these props for his sense of being elect, but also with the smoothness that seems to indicate wide learning; college socializes you, so you learn to present even trite ideas well.” These institutions cater to their students like high-end resorts.

    These elites, and the corporate system they serve, have ruined the country. These elite cannot solve our problems. They have been trained to find “solutions,” such as the trillion-dollar bailout of banks and financial firms, that sustain the system. They will feed the beast until it dies. Don?t expect them to save us. They don?t know how. And when it all collapses, when our rotten financial system with its trillions in worthless assets implodes, and our imperial wars end in humiliation and defeat, they will be exposed as being as helpless, and as stupid, as the rest of us.

  • Posted by don

    “Has the dollar peaked?”
    I doubt it. A lot of talk about the size of the U.S. external debt and running from the dollar. With the unfolding global slowdown, I would be more afraid for eoonomies that depend heavily on exports, as international trade tends to shrink more than apace with economic output. The only way out is currency manipulation, which would probably be dollar supportive.

  • Posted by locococo

    Some more of the “peaking” might “ping” as it leads to some more of the same at the same time as »event-full credits series« ceiling, hmm, sits down on your head? On the other side, none “too” sudden moves here would be well advised as tempers rise high. Proportions might help.

  • Posted by OGT

    I wouldn’t make any bets on currency levels, one way or the other. Right now it’s a race against US debt and export economies coming implosion. The math on a US GDP decline of 3%, which seems to be the median prediction, is very bad for China. I think most of Asia’s growth will surprise on the downside significantly in the next couple of quarters, which could set off yet another capital flight back to the dollar.

  • Posted by VicktorCapitalist

    Also, take a look at gold (against USD). It has been pretty resilient. In fact, with more and more countries plan to debase the fiat currency (e.g. SNB indicates quantitative easing), USD coming weakness can be limited (within 10% next 3 months) while precious metals may inflate.

    Disclosure: long gold

  • Posted by Phillip Huggan

    Finally a real explanation for why USD has appreciated.

    Brad, calling traders perverts doesn’t do anyone any good. Those heartless pricks are human beings too.

  • Posted by Global Monopoly

    It so happens that Brad isn’t one of those obsequious types described in your posted article. Rather he has a strange tendency to moralize at the establishment, while he does that in a diplomatic manner though.

  • Posted by Barkley Rosser

    I love that phrase, “flight to quality” in connection with the dollar during a crisis. Of course, if the dollar now crashes, we shall find out what quality it is made of, even if 90 day T-bills were briefly offering negative yields a few days ago. Such quality.

  • Posted by Euraussian


    What about FEERs at this junction. It looks as if the current levels for the currencies that count and float (more or less, not so sure about JPY) are about right. Expectations re the financial economy (interest rates, shareprices) differentials look pretty uniform (i.e. the differentials ate not going to change a lot unless something unexpected happens (which will, perhaps). Add the strange tale of the GBP (increasing rumors that Mr Brown is in the process of accelerating the inevitable surrender to Hun currency) and also the GBP looks OK vs the EUR. Finally, a firm dose of Teutonic medicine to the weaker members of the EUR bloc (and aspiring ones) would do no harm in a world economy where everyone is prepared for the worst. This is a moment where the Euro must and can be entrenched, and not only as ransom money for Mediterranean populists and overbuilders but also as a general barrier to pseudo-democratic forms of economic management that may raise their heads even in the Fatherland. Just a little while and the Danes and Swedes will realize that they are doing their economy a disservice by pandering to those pathetically anachronistic nationalists.

    But seriously, it does not look that either Japan or Europe will act as engines of growth (at least what US economists call growth, I call growth, growth in productive capacity and in affordable, wholesome private consumption). And although there may be a fair bit of FX volatility around these levels, they look OK for a new, and more orderly phase in economic relations betwen the US and the rest of the world.

  • Posted by Pascal

    This is just a correction. The problems you mentioned about Detroit going bakrupt and
    Madoff’s scheme are not reflected in the stock market, which leads me to believe this is just temporarily. The whole world is in the doldrums. Currencies won’t just stay at one price, something has to go up. I am betting on the dollar.

  • Posted by Global Monopoly

    @ Pascal: I wouldn’t advise you to bet on the dollar just yet. It would be wiser to bet on domestic banking stocks like Goldman Sachs, or even companies like General Electric, in delivery. Or a long future in the index with plenty of cash apart from the margin. The overall market direction is bullish for the medium term now. But it’s hard to call the bottom. Bulls have successfully defended 8000 several times, but you never know.

  • Posted by Global Monopoly

    I also got to know that Iran seems to have made a speech that they have wisely changed their forex reserves over to Euros from USD. It was claimed as a great decision both from an investments perspective and a political perspective.

    Really funny blog up there and some good info as well.

  • Posted by London Banker

    One of the interesting patterns in the events of this year is US banks using margin calls and collateral liquidations to export deflation globally. They appear to coordinate the margin calls, for example, the prime brokers MS, GS and JPM all raised margin by more than double on thousands of hedge funds on 1-2 October while they were simultaneously railroading the TARP through the House. Margin was due two weeks later, coinciding with a massive sell off in quality assets worldwide, especially gold and oil.

    The result is deflation overseas much worse than in the US, particularly to emerging economies where liquidity was more concentrated in the few big players and the hedge fund/private equity funds.

    As they have forced sell-offs abroad, they repatriate the margin or collateral proceeds, driving up the dollar and inflating the relative performance of US assets.

    Jobbing backwards, it was clear this margin deleveraging occurred in January, March and October – at the very least. As prime brokerage is largely unregulated and data is unreported, this happened outside the normal visibility of the markets.

    It would be interesting to know how closely involved Geithner and Paulson are in these margin calls.

    It will also be interesting to watch what happens when the deleveraging hits its limit, as the dollar will then be much more difficult to fluff.

  • Posted by gillies

    financial turbulence can reach a level where every prediction is wrong – even if some pundits get lucky – because events cease to be regular and predictable.

    maybe the dollar is due a correction – but if so, oil seems to be the commodity which most consistently goes in the opposite direction. so a correction for the dollar may go hand in hand with a bounce for oil.

    the turbulence will become more violent if political factors kick in. greece is part of the euro zone – but other countries which are not may suffer currency decline as the financial problems evolve into actual hardship. there will be an unending supply of baffled and aggrieved unemployed youth for street theatre. even in britain. confidence in the dollar only needs to be relative to the currencies that it is measured against.

    i suspect that as quasi academics – theorists on the sidelines – we blog contributors often have longer timescales than actual market operators. a thousand dollars earned from spotting temporary technical factors is still a thousand dollars. a thousand dollars foregone by holding gold while the price goes nowhere, is still a thousand dollars lost. the floor traders or day traders care less for the longer term.

    ireland expects : minus 4% economic growth next year 2009. inflation in october was – 4%. inflation in november – 2.5%. the irish figures may mean little to you, but look at the violence of the change ! german prudence may be balanced out by fragility on the european fringe. how many irelands, spains, romanias, can the e u core hold together ?

    has the dollar peaked ? maybe for now, but how wise is it to weather forecast in the perfect storm ?

    i will risk one prediction : like hoover, biro, kruger, google and ponzi – ‘madoff’ will come to be used as a generic term, an individual name which becomes shorthand for a whole load of related stuff.

  • Posted by gillies

    seasonal greetings :

    heavy media censorship has managed to keep this one off the front pages –

    santa has shot a couple of ageing reindeer and is busy laying off elves. the workshops are on a four day week. commentators blame outsourcing to far eastern mercantilists and a pension investment policy that was long icelandic krona.

  • Posted by Global Monopoly

    @ London Banker: Any other insights on how the ‘credit crisis’ got ‘globalized’?

  • Posted by bsetser

    Gillies — Brilliant (the bit about laying off the elves … ).

    My guess is that Madoff impacted to narrow a community to have staying power (subprime, by contrast … ) but I may be underestimating the power of the basic story.

  • Posted by bsetser

    Barkley — I find it interesting that almost no one claims the yen has benefited from a flight to quality, even though it has rallied more than the dollar!

    More seriously, I am not sure that there is a consensus on what constitutes quality now. Is it being restrained in your macro stimulus and preserving the quality of your credit at the expense of growth? Or is it using Keynesian counter-cyclical policies aggressively and pulling out of the slump first? It is letting your banks fail/ limiting public sector bailouts (which makes private assets low quality … but hurts the quality of public credit) or is it protecting the creditors of the banking system from losses and thus improving the quality of the banks credit?

  • Posted by bsetser

    OTG — I agree that a 3% y/y fall in US GDP led by a fall in consumption is bad for Asian exporters. I suspect it means most will resist pressure for appreciation v the USD far more than they resist pressure for depreciation. China obviously is feeling squeezed by its export slowdown in part because the CNY has appreciated v most of asia (JPY excepted) over the year. But even so, the y/y fall in China’s exports has been smaller than the y/y fall in many others — not that this matters for perceptions.

    What is more difficult for me to understand is what happens to the euro v the dollar once deleveraging more or less ends. Europe should have a surplus next year (big fall in oil/ commodity import bill). The US will still have a deficit if current trends continue — and that deficit will need to be financed with an economy that is shrinking and gov bonds yielding next to nothing. That seems $ negative. On the other hand, the Chi-american dollar block may be in rough balance next year, Europe may be in rough balance (or a small surplus) and the oil exporters in rough balance (or a small deficit) … and thus the US financing need may be effectively covered so long as China invests its surplus from Europe and its surplus from the US in the US, offsetting the ongoing US deficit with Europe and the (more modest) US deficit oil exporters

  • Posted by layman

    There are few economists who can claim that they saw the current crisis coming etc like Roubini, Schiff etc

    But can anyone point to one person who has predicted such a meteoric rise in the USD during 2008. I still haven’t found a single one yet.

  • Posted by Antiochian

    Don’t the US gold holdings constitute reserves? How are are these at the current time?

  • Posted by Olkon

    Imports into Russia fell 20%

    Russian Central Bank deputy confirms policy to widen ruble band – 2
    16:02 | 13/ 12/ 2008

    (Adds ruble comments, details in paras 7-12)

    MOSCOW, December 13 (RIA Novosti) – Russia will continue to gradually expand the ruble’s exchange rate corridor in the interests of society and business, the deputy head of the Central Bank said on Saturday.

    “Here there is a political and a philosophical aspect. This is our attitude toward society and business, the formation of trust,” Central Bank First Deputy Chairman Alexei Ulyukayev said on Ekho Moskvsy (Echo of Moscow) radio. “We could deftly lighten your pockets, but we are not doing this.”

    He also told the station that oil prices had pretty much bottomed out by dropping below $50 a barrel.

    Asked if $40-$50 a barrel was a realistic range for crude, he said: “In the price of oil we see that it has approached some kind of bottom.”

    In New York on Friday, benchmark light sweet crude closed down $1.70 at $46.28.

    Ulyukayev also said that imports into Russia fell 20% in November, due to a weaker ruble and slowing domestic demand.

    He added that imports would probably not increase next year, and may decrease, but said that meant the country’s current account would be positive.

    “Thus, we can expect both an economic downturn, and an increase in the exchange rate of the ruble against the two-currency basket,” the central banker said.

    He also said the ruble was effectively becoming a regional reserve currency. “If we get through the crisis OK, this will become a stronger role for the ruble,” he said in the Echo of Moscow interview.

    Ulyukayev added that some of Russia’s transactions with Ukraine, Belarus and Kazakhstan were now conducted in rubles, and businessmen in the countries were also using rubles.

    “This shows that they have faith in the ruble,” he said.

    Government economic analyst Andrei Zverev said on Friday that Russians were moving their savings into dollars and would continue to do so.

    The Economic Development and Trade Ministry said on Friday that Russia’s GDP growth in the fourth quarter would be 2.6%, adding that since late October the economy had been contracting.

  • Posted by RED

    Quite a few comments that the Asian block will look to retain their currency rates vs the US dollar. If they do, then this effectively gets the US back into growth mode. Theoretically, the US Government can print and handout a 20,000 cheque to every citizen, with which to buy Asian products at retailers. It won’t be inflationary because the money gets sterilized by the Chinese government, and you are saying that the Chinese will defend the Yuan and not let it appreciate.

    We all know that when this type of free arbitrage opportunity exists it will be pushed to the limit by the US banksters and powers that be.

    In my view, the Yuan must appreciate. If it doesn’t the US government will print so much money that the Chinese will drown in dollars to their own peril. And if the rate doesn’t change, well the Asians are basically letting the US economy to get back up and running.

  • Posted by steve moody

    From 2003 on, a lot of USD selling was directly related to the USD-based carry trade into Russia, Ukraine and Kazakhstan. Same for the Yen. The difference is that the Yen-based carry trade was much bigger than USD-based–on the order of USD 6.0 trillion compared to less than 1 trillion of USD-based. When asset prices began falling in all classes, investors had to unwind their carry trades in both currencies,and the USD and Yen rallied in response.
    One would suspect that at least some of the USD selling currently is related to zero yields on Treasuries. Central Banks can take profits too.

  • Posted by Euraussian


    Finally a good reason for China to appreciate!

  • Posted by Global Monopoly

    Korea has obtained almost $50 billion — far more than it ever actually borrowed from the IMF and the World Bank in 1997 and 1998 — without going to Washington. And that is an important change.

    These moves are better understood from easy to see public information on the moves of various large banks. E.g. Citibank’s re opening in Tokyo shows Japan continues to be a close ally.

    Citibank sets up branch for wealthy customers
    Tuesday, January 8, 2008 at 05:00 EST
    TOKYO — Citibank Japan Ltd, a Japanese banking subsidiary of U.S. financial giant Citigroup Inc, said Monday it has established a branch in central Tokyo to cater to wealthy customers.
    ..Equipped with four consulting rooms, the new branch offers products such as loans collateralized by real estate or securities.
    Citibank Japan may increase the number of such branches, bank officials said.

    Citibank’s Tokyo operations were ordered closed in September 2004.
    “The lurid stories described by FSA officials and the press include charging exorbitant commission fees on 50-year structured bonds. In the most heinous cases, there were tales of lending money to clients to buy securities while using them as collateral to take out new loans.”

  • Posted by a

    “But can anyone point to one person who has predicted such a meteoric rise in the USD during 2008. ”

    Meteoric, I’m not sure. But there were plenty of currency analysts at investment banks who said buy the dollar vs the euro early to mid-year 2008. E.g. Stephen Jen in April 2008 predicted, “EUR/USD will sell off towards 1.40 by year-end.”

    Madoff: if it’s really 50 billion usd that investors have lost, then that’s a big chunk of change by any measure. It means fewer hedge funds and less liquidity (in the sense of wider spreads). Normally, this would also mean more volatility, but volatility is already so high for certain asset classes, I don’t think you can bet on this one.

  • Posted by gillies

    i get the impression that even successful predictions are coming to pass at a faster rate than the commentators expected.

    inflationary forces build gradually – but bankruptcies are sudden. unemployment is sudden. close downs are sudden. is everyone sure that helicopter policies can work within an effective timescale ?

    and would competitive devaluation be one of those things like the first world war that nobody wants but everybody gets ? so would there be any point in launching such an offensive ?

    a contracting global economy – with an exploding global supply of currency – collapsed treasuries and escalating interest rates ?

    if that is a good idea, i would hate to hear the bad ones . . .

  • Posted by gillies

    thankyou DJC – i think it was you – for the reference to the banking collapse of the venetians in the 1340s.

    (google ‘venice / 1340 / financial’)

    a good long perspective. those who know how they would have prevented 1929 might like to say how they would have handled 1345 !

  • Posted by Global Monopoly

    A financial crisis isn’t something new. It’s been happening all around the world, every few years in each economy, you have the boom and bust sequence.

  • Posted by Estragon

    bsetser – “More seriously, I am not sure that there is a consensus on what constitutes quality now”

    You may be overthinking this a bit. Quality, at this juncture, has little to do with the relative merits of impairing sovereign debt in support of private debt, or countercyclical policy.

    Quality is quite simply the likelihood of being able to turn an asset into ready cash very quickly. Those with ready cash are predator in current circumstances. Those without are prey.

  • Posted by Massimo GIANNINI - M.G. in Progress

    It is likely that at the end of the day US as well will get on Helicopter Ben and print money against deflation. No alternatives to the economics for Joe the Plumber. The future of the dollar is not bright!

  • Posted by adiemuso

    its the interest rates….they are paying almost 0% for overnite up till 1 wk for USD deposits…wat do u expect USD to strengthen on? printing of more USD?

  • Posted by Roland Manarin

    I returned from Europe last week and purchasing power parity tells me that the dollar is undervalued compared to the Euro.