Quote:
Originally Posted by rhodytrader
When you say the dollar is weakening, what do you mean? To me that doesn't necessarily sound like a fundamental statement. It's mearly a statement of how the USD has lost value against other currencies. That's reflected in the exchange rates, which you could say makes your statement a type of technical analysis. What fundamental basis do you have for your view?
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When I say that the dollar is weakening I'm refering to a weakening of the US econonmy relative to some of its main trading partners (Europe, China, etc.)
There is some pretty conflicting and divided opinion out there about how the US economy is going to do this year. My own view is that there is a good chance for a small recession. My main basis for this is the slowdown in housing in the US. Some think the bottom has been reached. I don't. I can still walk out my door and see houses that have been on the market six months or more. A continued slowdown in housing means less mortgage equity withdrawals which puts pressure on consumer spending. It will also have a continued effect on unemployment, which also impacts consumer spending. If housing has hit bottom then obviously my outlook is all wrong.
This quote from a recent report from Comstock Partners sums up my view quite well:
"In addition our own studies indicate that a serious economic slowdown in the period ahead is more likely to end in recession rather than a soft landing. Not only have soft landings been extremely rare in U.S. financial history, but expansionary cycles featuring a series of fed rate hikes, an inverted yield curve and a sharp drop in the growth rate of the leading indicators have almost always been followed by a recession and bear market. Note that the soft landing in 1995 was not associated with an inverted yield curve or a 20% drop in commodity prices, while the soft landing in 1985 was not preceded by a series of fed tightening moves. Every recession starts out looking like a soft landing in the period of transition between economic expansion and contraction that we are probably in today. In the current instance the unusual housing boom and subsequent collapse make the prospects for recession seem even more likely."
I'm not blown away by the supposedly 'good' data coming out of the US the past two weeks. I'm only too aware of the fudging that is done on the numbers. For example, this month's non-farm payroll headline number of 167k new jobs looks great on the surface. When you realise that 55k of those supposed new jobs are just the result of the Bureau of Labor Statistics 'birth/death' model it makes you think.
Last December US Treasury Secretary Henry Paulson talks up a strong US currency the day he's heading off to China to ask them, pretty please, to make the Chinese remnimbi appreciate ASAP (which obviously equates to a weaker dollar).
Europe had a much stronger growth year in 2006 than many expected, and looks to continue on that path into 2007 (more ECB rate hikes are widely expected). The Fed is in wait and see mode. Inflation looks like it still has a hold, but growth is easing off. Will it ease off just enough, and we end up with the goldilocks so hoped for? Or will it go too far, and inflation says just above desired levels? I wouldn't like to wager which way the Fed will go next at this point in time.
The fact that the dollar is the reserve currency of the world isn't in too much jeopardy at the moment, but it is being quietly questioned. Several countries are looking (well their central banks are looking) to shift some dollar reserves over into euros, just in case. The UAE announced this publicly, which can surely on mean that several others are doing it in private.
The US deficits are widely out of control, with no real end in sight. Only a weakened US dollar has any hope of boosting exports and cutting imports to stem the badness of the trade deficit. A weakening dollar also helps to ease the burden of other debts held by the US.
Of course in the world of forex everything is relative. If I thought that the US economy was going down the tubes, but that I also thought the EU ecomony was also hosed but worse than the US one, I would be a dollar bull.
Obviouly my firmness in this view shifts with time, and is constantly open to scrutiny to hopefully capture any long term change in trend.
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