IMO, the falling dollar is being driven more by the incredible level of USD denominated foreign reserves and the current account deficit, rather than interest rate differentials. Foreign appetite for USDs is just about satiated, so who will fund our current account deficit going forward? Just tonight, a comment by China on their desire to diversify out of the USD sent the USD plunging. It’s true a falling dollar should narrow the gap, but with the way manufacturing has moved overseas and with current labor cost differentials, it’s not clear to me that the trade deficit is as sensitive to changes in the USD as it once was, which means we would probably need to see a large drop in the USD to have a material impact. But a falling dollar is a delicate issue. There are so many USDs out there (held mainly in the form of US Treasuries) that triggering a mass exodus by foreigners seems like it would be disasterous.
On oil, supply projections are fairly flat from what I’ve seen, while demand is projected to grow significantly due mainly to India and China. It seems like the fundamentals are there to maintain a high price. It wasn’t that long ago that analysts predicting $80 oil were ridiculed on CNBC.
I agree with what you say. Thing is, our CAD is shrinking which should be bullish for the dollar but somehow the market doesn't care. Our interest rates are higher than Europe but the market doesn't care. Some countries in Europe have worse budget deficits. The current trend keeps on going on it's own momentum (piling on as Professional put it), but at some point there has to be a 'This is Stupid' moment where reality kicks in, and I'm guessing it probably has to happen before it no longer is profitable to make anything in Europe anymore.
On oil, supply projections are fairly flat from what I’ve seen, while demand is projected to grow significantly due mainly to India and China. It seems like the fundamentals are there to maintain a high price. It wasn’t that long ago that analysts predicting $80 oil were ridiculed on CNBC.
Indeed. However, as another freeper put it recently, China and India aren't that big in the global oil market and their demand hasn't gone up that much to warrant oil going from $20 to about $100 (400%) in just a few years. If that had happened in real estate or the stock market, we'd never hear the end of people screaming 'Bubble!' from the rooftops, yet in the case of oil (as in the currency markets), there hasn't been any 'This is Stupid' moments to drive home reality. In fact, supply has kept up with demand and has done so no matter how many hurricanes occur in the Gulf, how many speeches Chavez makes, how many threats come out of Tehran, or how many 'oil workers' get kidnapped in Nigeria.
The trend is bullish as speculators pile on but it has to end sometime. I don't know when that is but it certainly isn't now, which is why I'm still long.
Someone might have said that was the reason. Fact is China is already doing it.
China, Mainland had (3 months ending in March 2007)a net purchases of LT Treasuries of -$1.3b, net purchase total of US securities of +$41.7b.
(3 months ending in March 2007) net purchase of LT Treasuries +$13.7, total purchase of US securities of +$43.6.
Source: http://www.treas.gov/tic/snetusq.txt
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