Who’s winning the currency paralympics?
Today's Financial News - Posted January 23, 2009
The ruble is rolling downhill, the pound got pounded all the way back to 1985. What about that Demise of the Dollar?
by J. Christoph Amberger
Baltimore—(TFN): Twenty-five years ago, I was one of eight German exchange students at the University of Aberdeen in Scotland. Thanks to a relatively strong Deutsche Mark exchange rate, life was good, books were cheap, and beer a bargain. And I needed little more. In fact, considering the state of the British economy back in the days of the miners’ strike, I often felt pangs of guilt that my stipend allowed me to live much higher on the hog than my Scottish classmates were able to.
Of course, the Deutsche Mark’s purchasing power back then was nothing compared to that of the U.S. dollar. If we Germans were well off, the forty Americans spending their junior year at the U of A lived like kings.
I was reminded of this when the British pound—trading for $2 as little as a year ago—fell to its lowest level against the dollar since 1985
The pound dropped by as much as 2.7% to just $1.3503 today, for a 7% decline this week… and over 32% below last year’s highs.
British GDP in Q4 fell 1.5% as U.K. unemployment climbed to the highest level in nine years.
What happened to the Decline of the Dollar that many of my colleagues built their business franchises on?
By chance, I happened to pick up a financial bestseller a colleague of mine wanted me to push last year. Under the headline “The Smart Money Strategy,” he writes:
“The dollar is a currency fated to tumble. (…) Fortunately, there are many ways you can capitalize on a falling dollar. (…) The most direct—albeit short-term—approach to betting against the dollar is to buy put options on Dollar Index futures (USDX). (…) Consider buying U.S. Dollar Index put options dated at least four months into the future, looking for the index to fall below 80. Your maximum risk is the price you pay for your option plus transaction costs. Your profit potential is unlimited.”
His other recommendations: Euro Call options. And foreign-currency certificates of deposit… especially those invested in the Aussie, New Zealand and Canadian dollars and the South African rand.
Looks like those who took him by his word and switched their assets from U.S. equities into “hard currencies” jumped from the frying pan right into the fire. After all, who could possibly predict that creditors depend on debtors and sellers depend on buyers in the global economy? I’m surprised he didn’t recommend Russian rubles… considering they reflect an economy based on all the tangible things that according to hard-money thinking make for a stable currency.
But the Decline fo the Dollar has only just reversed. The ruble, for one, is headed for the longest run of weekly declines against the greenback since May 2005. Bank Rossii liquidated over $30 billion of its foreign currency reserves just this last week (the second-biggest drop on record) as it tried to slow the 29% slump against the dollar since August.
Russia’s reserves used to be the third-largest worldwide. Yet even their massive dollar sales cannot stop the decline.
In fact, I believe not a single physical greenback will actually leave Russia: Generations of Russians have grown up considering the dollar a repository of value… and are likely to convert devaluing ruble savings into dollars, just as they did throughout most of the 20th century, Communist prohibitions notwithstanding.
(Even my East German mother used to do that, back in the 1970’s.)
And as I pointed out yesterday, China now has a vested interest in curtailing the appreciation of the yuan. Not that there will be much of that, mind you, given that exports may slump 15% the first two quarters and GDP growth may be cut down to 5% this year.
For centrally managed countries whose competitive advantage lies in cheap labor and a cheap currency, there’s really only one way to go: Devalue. And then go back and devalue some more.
The Obama Administration is already calling foul, just in case. Not that they could do anything: The U.S. depends on cheap imports to keep inflation at bay—now more than ever as almost a trillion bucks will be squandered in “stimulus”…
I say forget about the Decline of the Dollar. It’s a new ballgame. Not professional football, mind you. Rather a currency paralympics. And the U.S. dollar has one thing going for it.
Sheer mass.
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3 Responses to “Who’s winning the currency paralympics?”
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January 25th, 2009 at 7:19 pm
Good article. Could you explain how a country like Japan, which is desperate for a weaker yen but is getting a strong one, could weaken its yen?
January 26th, 2009 at 5:20 pm
It used to be part of Japan’s currency strategy. It was quite simple: Have the Bank of Japan by dollars. They only (officially) stopped this a few years ago… but give it another quarter and the BoJ will be back in the game creating one of the key ingredients to global competitiveness… a devalued currency.
February 10th, 2009 at 9:23 pm
Assuming BOJ begins purchasing US$ in the next few months, should Japanese investors/companies increase their US equity holdings now before Yen weakens and USDollar strengthens?