Lead Headline right now MSNBC business page: “What happens if the dollar crashes?
By Daniel at 18 October, 2009, 2:45 pm
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Trade wars could break out and overexposed banks could collapse’”
1/3 of the way into the article:
“….From its spring peak, the dollar is down 11 percent against the yen, 16 percent against the euro, 21 percent against the Canadian dollar, and about 30 percent against the Brazilian and Australian currencies, which are benefiting from a commodity price spike. Against a broad market basket of all U.S. trading partners, and adjusted for inflation, the dollar has fallen 15 percent from its spring high….”
Then, 1/2 into the article comes the meat and potatoes:
“…..Obama Administration officials don’t seem perturbed by the dollar’s slide so far. A weaker dollar helps shrink the trade deficit by making American-made goods more competitive in world markets. Drew Greenblatt, owner of Marlin Steel Wire Products in Baltimore, which makes high-tech baskets for assembly lines, says he’s winning orders from countries that are better known as exporters. Exults Greenblatt: “We are shipping ice to Eskimos.”
This state of calm would vanish overnight, though, if the financial markets got a sense that the dollar’s decline was starting to snowball out of control. At that point, the invisible “force field” protecting the dollar would fade away, says Martin D. Weiss, chairman of Weiss Group, a financial data and analysis firm in Jupiter, Fla. Says Weiss: “We would become more like ordinary mortals and more vulnerable to attacks on our currency.”
The bearish case for the dollar is that the decline takes on a life of its own. Selling begets more selling. The world’s central bankers and finance ministers intervene to prop up the currency, but speculators, having tasted victory, aren’t scared off. Princeton University economist Paul R. Krugman once called this the Wile E. Coyote scenario, after the character in the Road Runner cartoons who runs off a cliff but doesn’t start to fall until he looks down and sees there’s nothing beneath his feet.
Speculation that the dollar is headed for a tumble can become self-fulfilling if traders rush for the exit. Ashraf Laidi, chief foreign exchange strategist at CMC Markets, a London currency and commodity brokerage, says “right now there is around a 30 percent to 40 percent chance we are going to see the dollar falling toward a crisis point.”
Dollar bulls like to point out that the currency rallied strongly last year during the worst of the financial crisis. But Laidi says that was no show of support for the dollar or the U.S. economy. Rather, he says, investors retreated from all types of risk and put their money into the most liquid, short-term instruments they could find—which just happened to be U.S. Treasury bills, which are held in accounts all over the world. Agrees Barclays’ Englander: “It wasn’t a long-term bet that the U.S. economy would be the most dynamic in the world.”
Currency traders don’t put much stock in the statements of support for a strong dollar by Treasury Secretary Timothy F. Geithner and other Administration officials. They note that Treasury chiefs dating back to the Clinton Administration have said they support a strong dollar, yet the U.S. has not supported its currency through purchases since 1995….”
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