Dollar Sinks Broadly After G7 Statement

http://www.foxnews.com/story/0,2933,97930,00.html

(Reuters)

CHICAGO — The dollar hit a near three-year low on Monday against the yen after markets read a Group of Seven (search) call for flexible exchange rates as a sign that Japan may hesitate to weaken its currency to boost exports.

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"We believe the Japanese government will still like to see (the dollar) around 115.0 yen, but it is not politically convenient" to intervene while the International Monetary Fund (search) meetings continue this week, Chen said. "Later this week or early next week, if the yen keeps on going up they will have to (intervene)," he added.

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Analysts continued to cite 111.40-50 yen as near-term support.

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"For a long time, the United States has been moving away from a strong dollar policy. This (the G7 statement) is definitely another nail in the coffin," said Lara Rhame, senior economist with Brown Brothers Harriman in New York.

...more...

http://www.morganstanley.com/GEFdata/digests/20030922-mon.html#anchor0

Global: Breakthrough

Stephen Roach (New York)
Morgan Stanley
Sept 22, 2003

An unbalanced global economy has finally come to its senses. At the just-concluded G-7 meetings in Dubai, the world’s major industrial economies have endorsed the basic premise of global rebalancing -- a long overdue adjustment in the dollar. This could well have profound and lasting implications for the world economy. It is an unequivocally positive development, in my view.

Policy statements are always clouded with ambiguity. That’s true of central bank policy directives, as well as communiqués released after G-7 meetings. But for me, the communiqué from the 20 September G-7 meeting in Dubai was crystal clear. Three words said it all -- “flexibility” and “market mechanisms.” G-7 finance ministers have finally conceded that “…more flexibility in exchange rates is desirable for major countries or economic areas to promote smooth and widespread adjustments in the international financial system, based on market mechanisms.” In plain English this means that the perils of external imbalances -- massive deficits in America and surpluses in Asia and, to a lesser extent, Europe -- are now center stage. Market-driven currency adjustments are seen as the means to correct these potentially destabilizing external balances. This is a thinly veiled message to the Japanese, suggesting they cease and desist from their campaign of currency manipulation. It also puts other nations on notice who have been pegging their exchange rates -- especially China and its neighbors in Asia -- that there is no escaping the endgame of market-based principles of currency flexibility. But the essence of the message is that an unbalanced world now needs a weaker US dollar.

Snip ......

History tells us that the US dollar has only just begun its downward descent. On a broad trade-weighted basis, the dollar (in real terms) has fallen about 8% from its early 2001 highs. In a full-blown current account adjustment, a drop of around three times that magnitude can be expected -- not all that different than the 30% real deprecation of the dollar that occurred in the late 1980s when the current-account disequilibrium was far less acute. In the end, a lopsided world has no choice other than to accede to a weaker dollar. The G-7’sDubai communiqué now puts the major economies of the world on the same page with respect to the global rebalancing that such a currency realignment can trigger. The road ahead will be long and arduous -- and not without risk, especially in oft-volatile currency markets.

Snip ......

I like to order stuff from overseas, typically France and Japan. And if the dollar drops in value, I now need more of them to get the things there I want. And with this drop in worth, we won't see an increase in pay here.

AGLGLGLGLGLG.

You know, sometimes, a global monetary unit seems REALLY APPEALING. Just give me my little Credstick with my Global Credits or Nuyen or Super Happy Purchase Unit or whatever the hell they decide to call it, so I can buy stuff overseas without worrying about how much my buck is really worth.

So...as the dollar weakens...

What will be the short and long term problems we will face?

I would imagine that prices of imported goods will inflate.

Interest rates will have to rise, right?

... I know there are some sharp people here that can break this down some more. I'm keeping it bumped until someone does :)

For some discussion of the impact of a falling dollar.

http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=103&topic_id=12660

Import prices will increase.

The stock market will decline, because foreign investors' purchases are now worth less than they were, and to avoid further loss, they will get out, leaving the market with less capital than before.

Interest rates will have to increase on other financials to keep existing foreign investors interested, or else they will cash out, too.

Exports should increase, although this will take longer than the increase in import prices (channels of distribution and so on have to be established).

If your business relies on imported components, your costs will go up.

It does tend to make American labor cheaper for the multinationals, although this may take longer as well for them to be sure that the long-term trend is toward weakening.


There's more, but this is just a dash and hit post-

but I watch patterns and trends - here is a timeline that I find exceptionally helpful at this point

http://www.huppi.com/kangaroo/Timeline.htm

:evilgrin:

From what I gather, the biggest problem we will face (as a nation) is how to finance the deficit. In order for the US to raise money it needs to spend, but doesn't have, it sells bonds and treasury notes.

Most of the entities that buy these financial 'instruments' (high finance term, eh? I picked that up in the stock thread) are from overseas.

When the dollar drops, the $1000 someone invested last year becomes something more like $990, or even less. That makes US treasuries a lousy investment. That means treasuries are hard to sell, since they are a lousy investment, if you normally make your money in something other than dollars.

And that would mean we couldn't finance the deficit by selling treasuries and bonds.

That would mean we'd have to print currency (or the same done via computer) in order to finance the deficit.

And that would mean that the dollar would drop even faster, and inflation would rise dramatically, since we'd be printing money.

But on the bright side, as I said once last week, with bank cards and ATMs, hyperinflation is a LOT more convenient than it used to be. No more lugging huge sacks of cash to the store just to buy a gallon of gas.