US dollar continuing upward

Foreign Exchange Currency Outlook : With hardly anyone noticing, the focus in the market has shifted from relative interest rates to growth, and from monetary policy to fiscal policy. Nobody can imagine that the issuance of Treasuries that must, by definition, accompany the new funding of Fannie and Freddie is neutral, and yet nobody seems to care very much about the US budget deficit. Academics and fear-mongers, including such luminaries as former Fed chairman Volcker, occasionally jump up to warn against impending doom from excessive Federal deficits, and yet the machine rolls on with foreigners, including sovereigns, willing to buy this paper.

Some are worried (again) that the US is becoming Japan, deflation-ridden and overspending to the point of a ratings level on a par with Botswana. But the US in not Japan if only because the consumer is different. We always joke that Americans can be more materialistic because we have the space to store Stuff (thank you, George Carlin) and the Japanese do not have that luxury, but the deeper reason is endless optimism compared to other cultures, including Japan and Europe. This is why we do not save…. We think we don’t have to. There will always be a windfall.

This business of the government saving the housing sector is a fine case in point. How else to look at it other than a windfall for the vast majority of homeowners, which is the vast majority of Americans? Mr. Paulson may have acted in large part to maintain the reputation of the US among foreign investors, but the net effect so far is the rescue of the guy in Scarsdale or Scottsdale as much as the Japanese pension fund. Paulson is right that we have to figure out whether the government should be in the housing business at all, but in the meanwhile, we have relief. Of course the problem is just pushed off into the future, but that’s where we like our problems to reside.

This may not be a good way to run a country or a government or a society, but for FX traders, the temporary solution is the only one that counts. Monsters may be lurking under the bed (mostly in the form of reserve diversification), but if big investors don’t care about looming budget deficits and are happy to see the trade deficit contract, who are we to call them short-sighted? The long run is a series of short runs, said Mr. Keynes, and when it comes to trading, he’s right. If the market chooses to see a systemic risk deferred, that’s what counts, even if other risks are just as big or bigger.

After all, we have known for two decades (since the S&L debacle) that the GSE’s made no sense and were run wrong. Now somebody else will be running that market, probably a whole batch of private players, and that works for the US system. It may not work elsewhere, but it works for the US. It’s important not to underestimate the relief that accompanies acknowledging that such a giant change can occur in the US, over $5 trillion, and not rattle the world. In any other country, the failure of an government organization the size of Freddie and Fannie would have caused stock market crashes, a currency crash, and heaven knows what else. In the US, we have embraced the change and do not fear the future, which is sure to be fraught with problems—-but never mind.

This is why we see the US dollar continuing upward. The US is weathering a storm. Foreign Exchange Traders like that.

Whoever started the dollar rally Sunday night deserves a lot of credit.

Bye For Now

Barbara Rockefeller

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