Thanksgiving Week's Dollar Decline
In these last few days, the US dollar has broken out on the downside of its comfortable 1.25-1.28 range against the euro where it had been for the previous five months or so.
The dollar's erosion is slow because there are indeed countervailing forces around the world: other countries have structural problems too.
We have to give due consideration to the fact that markets on Thursday and Friday were thin and also that the most recent low point for the dollar was December 2004/January 2005, reaching 1.36 vs the euro, and then it recovered somewhat, up to around 1.18.
So we'll have to see whether in December 2006/January 2007 it breaches the 1.36 level vs the euro. Beyond that is 1.46 going back to 1995. These are the significant levels. See article Erosion Of The US Dollar? (http://tinyurl.com/y98fcr).
In my view, relative productivity growth is a key driver in long-term foreign exchange rates, though little talked about.
What is more worrying this time around is that productivity growth ground to halt in the US in the third quarter. This is a sign that the potential growth rate of the US economy will be lower for years to come, on par with Europe's anemic growth rates in these past 15 years or so, not to mention Japan.
I agree with those who expect that, in view of high debt levels and historical performance, inflation/stagflation camouflauged as growth is a more likely scenario than deflation/recession, regardless of how salubrious a relatively short period of deflation/recession would be for the structure of the US economy.
But history shows that neither political leaders nor society at large have enough discipline for that; they usually need to be hit over the head.
Anyway, let's wait for at least mid-January before declaring a debt/inflation-induced dollar melt-down endgame: countervailing forces, combined with intervention - mostly
verbal, (see http://tinyurl.com/yyb8a9) -, may indeed give the dollar another year of respite, with slow, orderly erosion as we've seen in the past several years.
The dollar's erosion is slow because there are indeed countervailing forces around the world: other countries have structural problems too.
We have to give due consideration to the fact that markets on Thursday and Friday were thin and also that the most recent low point for the dollar was December 2004/January 2005, reaching 1.36 vs the euro, and then it recovered somewhat, up to around 1.18.
So we'll have to see whether in December 2006/January 2007 it breaches the 1.36 level vs the euro. Beyond that is 1.46 going back to 1995. These are the significant levels. See article Erosion Of The US Dollar? (http://tinyurl.com/y98fcr).
In my view, relative productivity growth is a key driver in long-term foreign exchange rates, though little talked about.
What is more worrying this time around is that productivity growth ground to halt in the US in the third quarter. This is a sign that the potential growth rate of the US economy will be lower for years to come, on par with Europe's anemic growth rates in these past 15 years or so, not to mention Japan.
I agree with those who expect that, in view of high debt levels and historical performance, inflation/stagflation camouflauged as growth is a more likely scenario than deflation/recession, regardless of how salubrious a relatively short period of deflation/recession would be for the structure of the US economy.
But history shows that neither political leaders nor society at large have enough discipline for that; they usually need to be hit over the head.
Anyway, let's wait for at least mid-January before declaring a debt/inflation-induced dollar melt-down endgame: countervailing forces, combined with intervention - mostly
verbal, (see http://tinyurl.com/yyb8a9) -, may indeed give the dollar another year of respite, with slow, orderly erosion as we've seen in the past several years.
posted by Stephanos of Epiros @ 3:10 AM
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