Losing touch with reality...

[Wildbill]

While the dollar had to devalue at some point, I think this "war tensions" reasoning made no sense. Now I think the Euro is getting overvalued without question. What makes the Euro a better place to store money than the dollar? Do traders really think the US would have any troubles getting the desired results from Iraq? And what about the consequences of a war. I think its ridiculous, the US will come out a lot better from it than Europe will. Europe will freeze up just as much economically, if not more. There will be a lot more indecision there due to the divergent opinion and closer location to Iraq. Oil prices going up hurts most of Europe a lot more (outside of Norway) than it will hurt the US. I think everything is positive out of this in the medium term. Why is this causing such short-term consternation in the markets I just don't know. The US economy gets the spending kick from war, the Europeans just get the heartburn from it. Further the Euro's overvaluation is just asking for more trouble in the very near future. Europe is already uncompetitive and will just get more so with this runup in value. Europe's major economies depend heavily on a competitive Euro because the world certainly knows they don't compete on price with their burdensome labor structure. In all the only way one could say the dollar is worth less is if they truly believed the US would suffer catastrophic losses which just seems impossible. In two years time people will realize that they just let emotions get to them here and take what was a proper devaluation and then let irrational reasoning and momentum carry it too far. Around parity or just under it and I think you are see a fair value, so right now the Euro is at least 7% overvalued IMO. It would be one thing if Europe was seeing some real benefits right now, but they aren't. In spots they are merely catching up, in others they are hopelessly lagging the US economy. For all the badmouthing the US economy gets, its still looking like 2-3% growth will continue for awhile. In Europe only a handful of countries can claim to be so lucky.

[adios]

I'm not an expert on currency values but I do know currency rates are volatile. It does look like the dollar has lost more of it's value to the Euro and the Pound than other currencies. It might have something to do with European central bank monetary policies. I agree with the points you make though. You hear the current accounts defecit mentioned a lot. Supposedly European investors are pulling out of US bonds and equities to a greater degree than investors from other parts of the world.

[scalf]

/forums/images/icons/tongue.gif dollar vs euro...right now more financial /forums/images/icons/tongue.gif (i.e. interest and liquidity) than economic...jmho..gl

[Wildbill]

Its a double edged sword. The interest rates are higher in Euroland which should be a small additive to the Euro, but these are the two biggest currencies in the world, the interest rate differential is not as important as it is against lesser currencies. It still doesn't matter much, what I am mentioning is the idea that the Euro is a safe haven in the event of war with Iraq which is a concept I find patently ridiculous. Europe won't do better than the US in the event of a war, they will do worse. They are more sensitive to oil prices and to world trade flows, the two things that probably will be sent out of normal conditions by war in Iraq. Further the US has a lot more cushion to work with than Europe because we have a homogenous economy, we don't have the issues you seen in a grouping of different countries with different inflation and growth rates. In fact most of Europe's growth is being driven by countries catching up to the big boys. Spain and Ireland are where the growth is right now and those are just two countries with economies catching up to the levels of Germany and France. If you didn't have that, you would see a really sick patient in Euroland and the idea that it was competing with the US for investment or really anything economically would look silly. In all this is just me wondering what are investors thinking. Maybe all the big players really are faking out the market and saying war fears while really just trading based on fundamentals, but I doubt it. In any case I think that its a trap that will catch a lot of unsophisticated investors off guard. They will see the international markets doing better and invest there, but then get caught in lousy returns as reality catches up and people realize all those gains were merely due to currency, not stronger markets.

[GeorgeF]

1) When the euro started trading it was $1.20/euro now it is $1.06/euro. The US$ is still ahead. Until the dollar hits $1.50/euro I am not willing to say the dollar has
been devalued.

"Oil prices going up hurts most of Europe a lot more"
I don't think so, europe has the north sea oil + russian oil not to mention the consume less in general.

"Do traders really think the US would have any troubles getting the desired results from Iraq?"

I have to wonder about that myself. Iraq seems to be between Iran and Lebanon both of which are Hezbollah country. I am also unsure what the Bush administation plans to do once Saddam is gone. Rebuilding Iraq will be expensive, I don't see the US being willing to make the sacrifices necessary to do the job.

"The US economy gets the spending kick from war, the Europeans just get the heartburn from it. "

In war the smart money is on those that are not fighting it.

"Europe is already uncompetitive "
Compared with China in manufacuring and India in IT no one is competitive.

"Europe's major economies depend heavily on a competitive Euro because the world certainly knows they don't compete on price with their burdensome labor structure. "

The new BMW's look might fine. European expansion will give them access to large pools of cheap labor.

" In all the only way one could say the dollar is worth less is if they truly believed the US would suffer catastrophic losses which just seems impossible."

I was in NYC on 9-11. I have doubts about the US governments ability to protect the US.

"For all the badmouthing the US economy gets, its still looking like 2-3% growth will continue for awhile. In Europe only a handful of countries can claim to be so lucky."

See: http://www.smithers.co.uk/newsdyn.php?pgtype=news&pgnm=article&pgmime=&pgndx =28

2) There seems to be a consious policy by the Bush administration to weaken the US$. So called impartial federal reserve bankers are taking about flooding the world markets with dollars. A devalued dollar will also make it easier for states, municipalities and homeowners to repay debts

3) The euro interest rates are misleading because of european expansion. The ECB does not need to lower rates to expand money supply. Just imagine the increase in money supply if the US made Peru the 51st state and the people there could borrow US$ at US rates.

4) I put most of my bond money in GIM FCO FAX, TEI along with vanguard TIPS. If you decide to be patriotic and support our president in his attempt to reduce the value of the US$ those are some good funds.

5)www.everbank.com is an online bank offering foriegn currency accounts I have considered. Since yeilds are so low forgein denominated travelers checks might work. There are also metals and mining stocks.

[Wildbill]

1. Europe is more hurt by higher oil prices, just not for cars. Europe has no sources of oil inside the Euro countries, Norway, UK, and Russia aren't part of it. They also hold almost no reserves, if the US wanted to they could release the strategic reserve for a short period of time and no shortage of oil would be the result. Good luck getting that in a Euro country. While lower consumer uses might seem important, reality is that oil price rises are easily passed onto the consumer in the US, but higher oil prices are passed onto the society in Europe due to more national industries and public transportation. That creates problems when prices spike as no one really conserves much, if gas prices go up in the US people will drive less and private companies will conserve some energy. Its not good for either, but I think the common thought that the US loses most is not really true since we do have a segment of the economy that does well if oil prices go up.
2. Cost reduction would be nice, problem is that European governments prevent sending much money away by their taxation schemes and attempts to "protect" jobs and national industries. If only they believed in it, the European view of the free trade world is that exports are great, but imports ruin the economy. They love to export capital, but only to the degree that they produce product and sell it in another country. That is a major flaw in their thinking and why they are hurting so much from a lack of economic vitality.
3. Protecting the country from any and all acts is unrealistic. That is the world we live in. However, the Europeans aren't immune to attack either. Bush will get some support from them for the attack, no matter what it is, and that will make the terrorists consider Europeans "repsonsible" as well.

As for the drop in the Euro value, it was overvalued to start with and everyone accepted that. The expectation of a common currency drove up the value of the local currencies and the ECB didn't want to value it more reasonably, they wanted to look strong upon launch. Believe me most economists will tell you fair value right now is not anything over parity, at least as long as Europe trudges along slower than the US. Adding the 10 new entrants just makes it worse. They get growth, they get new markets, but worst of all they get unbelievable costs that will drag the economy of the EU down for quite some time. Its a nice idea for say 2030, but its not an idea that will do well anytime in 10 years as they have long said they would need to be the most competitive place on earth.

[GeorgeF]

I think you are thinking too much about places like France. What is exciting about Europe are places like Poland and Bulgaria.
FWIW, the Big Mac index indictes that the Pound is overvalued and the euro and dollar are in line.

http://www.economist.com/markets/displayStory.cfm?story_id=1537385

[Wildbill]

Those are exciting places, but not Euro places. Euro trading ranges are all that matter right now when it comes to valuation. I think the Euro has taken on a "one-way" bet characteristic right now, but those usually go too far and correct unless they are in countries fighting to maintain impossible valuations. The US does nothing to change its values and lets the markets get out of hand. Of course right now its doing what the US would quietly like it to do so maybe there is something to this sabre-rattling by GW that we haven't thought about. Its a brilliant plan if you ask me, I think all the administration has done is the marks of strategic genius...that is if they do exactly as I expect and back off. Think about it, they get to order the world around for future needs, they get to force a lot of countries in the world to take up some baggage (as we see with all of North Korea's neighbors), and ultimately they get to revalue the dollar with no cost to themselves. All this and all the while the country looks as powerful as ever. I know it seems silly but in the last week I have come to see this might be a brilliant plan, but who knows if its their real intention. Time will tell...

As for the Big Mac index, well always found it a cute little way to put things, but of course it does have limited value. After all things such as rent, salaries, and local demand do have something to do with it.

[mdlm]

The fall of the dollar is not a response to a short-term issue such as the war in Iraq.

The world has come to the tentative conclusion that the United States is no longer interested in abiding by international law. The next few weeks are critical. If the US decides to unilaterally pursue an Iraq strategy, that will be the end of the US as we know it.

The dollar will then enter into a long-term secular decline as the US ceases to be the dominant world power.

[Wildbill]

The chances of that are somewhere between slim and none. It is all about posturing right now. Sure GW is making the world think that and the team are all in line sounding those words, but look at the choices and you will see that if he sat back and played it safe and cautious he would get nowhere. That is what is at risk. All the actions right now are about getting things in line, getting other players into line. If you just slowly go along then things get decided years from now. GW talks it up, but there is very little chance, IMO, that he goes in unilaterally. Just don't see it happening and one of the best reasons is exactly the one you just mentioned. I think its a brilliant scheme, or at least I hope it is. Just look at where it all stands now, everything has played out positively so far, but a full scale invasion and it may not be so clean. For now he has the UN working for him, he has the world out choosing sides so he can see where things fall, he has the Middle East scurring around try to get things done, he has the dollar falling so business people are happy, he has the voters focused on things he does well in...what am I forgetting? Its all calculated and working out rather perfectly.

[mdlm]

ABM, Kyoto unilaterally abrogated so it's not just posturing.

everything has played out positively so far

I think that just about every country outside of US/England would disagree with this statement. Even in England newspapers are reporting that Blair is faced with a "nightmare" decision if US decides to go to war.

[Wildbill]

Why do you pay attention to that. I am saying pay attention to what he would hope to gain right now, what he has gained, and then what would he have gained by "playing nice" so far. If you think any progress would have been made had he not used the brinkmanship card you are kidding yourself. Playing by UN standards, or shall we say nice Euro-style rules would have done NOTHING. There wouldn't even be inspectors, let alone cooperative efforts at exile by Middle Eastern leaders. Once again stop paying attention to these whiners and realize he has done nothing more than classic brinkmanship theory and by calculations it has worked so well why would he bother going so far as to act unilaterally? He is backing the French and pacifists into a corner brilliantly and will "at the right time" give the smoking gun evidence. At that point Saddam will either go quickly or the French and others will capitulate on the next resolution. Don't we have any poker players here to see this is strategic???

[mdlm]

Your original post was about the fate of the dollar, not whether Bush is smart, strategic, or correct. For the dollar the only thing that matters is that there is a large and growing schism between the US and the rest of the world. The bigger that divide becomes the worse the dollar will fare.

We'll know a lot more next week. Tue is State of Union and Blair will be meeting with Bush a few days later.

If war is planned for Feb outline should be available week after.

If we go to war in Feb that will be the end of the dollar as we know it.

[Wildbill]

End of the dollar as we know it? That is a pretty bold statement. I don't see anything other than a temporarily weak dollar that rebounds if there ever is a real war. Notice how Bush now says maybe he delays. I think it is a nice profitable trade now to follow momentum with the Euro, but its just a simple one-way bet that will get hammered the other way in short order. Fundamentally Europe isn't competitive over the next 10 years and investors that get into it now will find that out the hard way.

[brad]

fed bernake said something like the fed is ready to pump 'unlimited' amounts of dollars in in case of deflation.

so maybe people are afraid of getting watered down dollars.

[mdlm]

Fundamentally Europe isn't competitive over the next 10 years and investors that get into it now will find that out the hard way.

You continue to focus on economic issues. That is not what is killing the dollar. What is killing the dollar is that the US is increasingly seen as a country that no longer abides by international law. If the US invades Iraq in the next month or two that will be the end.

[Wildbill]

And you are jumping to some very unlikely conclusions. Even if it took action without some UN reasoning, it isn't against any laws. Traders don't care about that at all. They would only care if that meant some future sanction that would change fundamentals in the country, but that isn't the case. GW is only pushing this card right now because no one else seems to react without it. I guess you could make the argument that this would seal the US to being permanent world cop, but it already occupies the spot. I just don't see your reasoning being true. There is nothing illegal going on and no economic result comes out of it. Your reasoning sounds like you think the rest of the world is going to abandon the US because it doesn't play nice, but you must be kidding if you believe that. So please explain to me how your view makes economic sense to drive billions of dollars of bets.

[mdlm]

Even if it took action without some UN reasoning, it isn't against any laws

Unilateral invasion would violate dozens of agreements starting from the 1648 Treaty of Westphalia through the last UN agreement on inspections in Iraq.

You continue to focus on short-term effects. Long-term no country that has removed itself from the restraints of international rule will be allowed to exist. The dollar will no longer be the world's reserve currency and will drop hard, just like the currencies of all countries that pursue this course.