A Stronger Dollar: After Many a Summer Dies the Swan

This is the kind of situation that tends to wobble forward from momentum until it hits a crack in the pavement, some trigger event, then topples into a ditch and a full blown crisis, often when we least expect it.

I have not been reading many other financial blogs lately, giving more time to family and preparing for what is to come. I wonder if the more strident true believers in a stronger dollar through deflation have relaxed belief in the improbable yet, or if they are still flogging the data to support a mistaken theory.

Its one thing to be wrong. Everyone is, at one time or another, including yours truly. But its especially costly, sometimes fatally so, to be stubborn after your time has come and gone.

If equities take another leg down, as we suspect they will, then the dollar will strengthen once again, perhaps impressively. But it is just a shifting in allocations in a dollar universe that is changing, often slowly, into something that will likely be quite different, as in a black swan event.

As you know the position we took on this question was to make the case that in a fiat currency regime a range of outcomes are technically possible (and still are). But the probability of inflation was overwhelming when the facts were considered dispassionately.

As a general rule, the louder the rhetoric, the weaker the case to be made for a viewpoint.

Look at the data and be guided by it in all other things of this world.


Bloomberg
Dollar Declines as Slump Prompts Nations to Mull Alternative
By Oliver Biggadike and Matthew Brown

June 2 (Bloomberg) -- The dollar dropped to its lowest level against the euro this year on speculation record U.S. borrowing will undermine the greenback, prompting nations to consider alternatives to the world’s main reserve currency.

The 16-nation euro gained for a fourth day versus the dollar as the Russian government said emerging-market leaders may discuss the idea of a supranational currency. The pound strengthened to $1.65 for the first time since October.

“There’s been a lot of talk out of Russia about a new global currency, and that’s contributing toward this latest bout of dollar weakness,” said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London. “These latest comments are just adding to the general dollar weakness we’ve seen recently...”

Russian Proposal

Russian President Dmitry Medvedev may discuss his proposal to create a new world currency when he meets counterparts from Brazil, India and China this month, Natalya Timakova, a spokeswoman for the president, told reporters by phone today. Medvedev first proposed seeking alternatives to the U.S. dollar as a reserve currency in March.

The dollar also declined on speculation “smaller” central banks started today’s selling of the greenback, said Sebastien Galy, a currency strategist at BNP Paribas SA in New York.

“If people believe that there is official pressure behind it, then obviously it puts pressure on euro-dollar on the upside,” Galy said. Galy predicted the 16-nation currency may reach $1.4360 today, a peak last reached in December.

There will be demand for the record amount of debt the U.S. is selling, Treasury Secretary Timothy Geithner said in an interview earlier today with state media outlets in China.

China’s ‘Understanding’

China has a “very sophisticated understanding” of why the U.S. is running up budget deficits, Geithner said in Beijing, pledging to rein in borrowing later.

“Despite the more comforting words we’ve had from the Chinese to the U.S. overnight, it does seem that the world’s reserve managers are still concerned about exposure to the dollar,” said Ian Stannard, a foreign-exchange strategist in London at BNP Paribas SA...

‘Last Stage’

The euro’s rally against the dollar may be entering its “last stage,” and investors would likely benefit from selling the 16-nation currency against the greenback, UBS AG said.

Europe’s currency is poised to weaken toward $1.30, analysts led by Mansoor Mohi-uddin, Zurich-based chief currency strategist at the world’s second-biggest foreign-exchange trader, wrote in a note to clients yesterday. The analysts reiterated forecasts for the euro to trade at $1.40 in one month’s time and weaken to $1.30 in three months.

“We remain positive on the U.S. dollar and think that the greenback is likely in its final stage of weakness,” the analysts wrote. “Equity and bond flows have the potential to surprise and could lend support to the dollar.”

To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net; Matthew Brown in London at mbrown42@bloomberg.net