Investment Postcards details why the dollar is in jeopardy:

David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, points out that there is one policy tool that is practically unchanged since two years ago … the US dollar. “It is the only policy tool that has not budged one iota since the crisis erupted two years ago. But we are sure that as the unemployment rate makes new highs and increasingly poses a political hurdle in a mid-term election year, it would make perfect sense for a country that always operates in its best interest - even if it may not be in everyone’s best interest - to sanction a US dollar devaluation as a means to stimulate the domestic economy,” he said.

Makes sense, but lets look at the other side of the coin (needed a currency pun in there). If the U.S. were to intentionally devalue the dollar, not only would that mean we were willing to piss off China (a country we seem to be rather reliant on in any recovery story), but it would also mean other developed countries were not, in fact, attempting the same thing (call it the paradox of devaluing - all currencies can't be worth-less against one another).

UPDATE:
Mosaic of the Mind asked:

Why would there be such a reversal while the American markets have "rallied"?

My response (I'd love feedback):

When markets sold off / dollar rallied in Sept-Nov it was due in large part to levered investors (ie. hedge funds) that were forced to sell off their positions. The dollar has been used as a carry trade (investors borrowed cheaply in dollars then exchanged these dollars for the local currency of their investment).

One example is Russia, where many investors borrowed in dollars, exchanged for Rubles (hence Rubles had rallied) and invested in Russia. Then from Sept-Nov, ~$100 billion in "hot money" was pulled and these investors closed their dollars / ruble positions to close their dollar borrowings (Russia may actually be a bad example as their dependence on oil is causing magnificent problems now... but ignore them for this thought experiment).

One can assume that the majority of this unwind ended ~Nov. 20th (though I think this is just the first wave). Now that these trades are unwound and equity markets have rallied, there is no longer the need or demand to buy dollars to close such trades. Thus, the dollar has sold off after being overbought due to:

• The end of this unwind
• The incredibly low interest rates, which will likely stimulate another wave of carry trades

Get ready for additional waves / volatility as leverage continues to work its way through the system.

Click chart for larger image:



Source: Investment Postcards

I detailed just over a week ago that I was not bearish on the dollar long term, but...

I do think some / a lot of the move we've seen over the past few months was largely due to the deleveraging of global investments, and I do expect that to reverse in the coming months.

And here we go...


I actually see this as a positive sign that global markets are returning to some normalcy. When interest rates are practically zero and the printing press is in the process of being warmed up, investors SHOULDN'T WANT TO INVEST in the dollar.

A lot has been discussed of late as to type of impact the global slowdown will have on both exports and the dollar. The thought is that the slowdown will decrease our exports (true) and that will decrease demand for dollars, which pay for said exports.

Of course there is another side of the story, imports. In a slowing U.S. economy, we will be importing significantly less from abroad. Items we will be importing less of are commodities (which have also priced significantly lower) and consumer goods (which are under severe pressure as the U.S. consumer delevers).

What have we seen? While service (non-manufacturing) exports are indeed falling faster than imports, the 12 month average is still positive. On the other hand, the manufacturers index actually shows the reverse (i.e. imports falling faster, likely due to the crash in commodity prices).


Given all of this and the economic problems associated with global markets, I am not a dollar bear. I definitely feel there will be weakening in the absolute value of a dollar (i.e. inflation) at some point due to the oversupply, but I expect this to happen across all currencies. Thus, the relative weakness of the dollar (which matters for exchange rates) won't be nearly as problematic. HOWEVER, I do think some / a lot of the move we've seen over the past few months was largely due to the deleveraging of global investments, and I do expect that to reverse in the coming months.

Source: ISM

Interesting write-up over at portfolio.com about the issues Britain is facing:

The deflation of the British housing bubble has only just begun. Prices, which rose at roughly double the U.S. rate over the past decade, tumbled about 10 percent from their peak in August 2007 through the middle of this summer. Inflation and unemployment are rising, and Britain is in a bear market.

Things might become worse in Britain than in the U.S. Consumers are more indebted; financial services make up an even greater portion of the economy; inflation takes a much more significant bite because the British have to import so much.

While the pound has crashed against the dollar over past week, the decline against the Euro can be tracked all the way back to last summer when the global housing downturn (and much of their problems) were revealed.

Update: more bad news for Britain...

Merrill has a British operating loss of about $29 billion that it can carry forward indefinitely for tax purposes. The newspaper calculates that at the current corporation tax rate of 28 percent, the bank will be able to offset losses against future profits, reducing its tax bill in Britain by as much as $8 billion.

I can't tell if I like the chart or not as it's possibly too tacky (the pic is from a recent protest in D.C.), but can anything really be too tacky?


Mexico City, (Reuters)

The peso last Friday broke past 10 pesos per dollar for the first time since late 2002 on expectations that Mexico's central bank will further tighten borrowing costs to battle a spike in inflation.

That would further widen the spread between benchmark U.S. and Mexican interest rates and make peso-denominated assets more attractive to investors.