Flipping through the Sydney Morning Herald on Saturday at North Cronulla beach, something caught our eye we were not expecting. The U.S. dollar fell over the weekend, when Americans were shopping and not paying attention to the world’s opinion of America’s money. We believe the dollar will fail and ultimately fail as much as we believe the sun will rise in the east. But it has been so gradual in happening that sometimes we forget to look. And that’s when it happens.
When an asset-any asset-makes a sudden decline on very thin trading volume, something is up (or down.) So what is up with the dollar? After all, the news coming out of America over the weekend appeared bullish. Early reports show that same-store sales for American retailers were up nearly 19% from the same time last year.
They don’t call it “Black Friday” in America for nothing. Is it because the flurry of credit cards being drawn from wallets and purses and flung on to counters blocks out all natural and artificial light? Or is it just because American retailers expect to generate a large chunk of their seasonal profits in a single, frenzied, orgiastic fiesta of spending?
Hold that thought. The Chinese have answered our question for us, albeit indirectly. Wu Xialoing, a Chinese banking official said this weekend that the “The exchange rate of the US dollar, which is the major reserve currency, is going lower, increasing the depreciation risk for east Asian reserve assets.” When China whinges about the stability of the dollar, markets listen. Why?
The Chinese have a lot to lose from a falling dollar. After all, they own about a trillion of them, give or take a few million. Any declines in the buck erode the purchasing power of China’s carefully stored trade surplus. But if the Chinese money moguls are worried about the dollar, what can they really do? Signalling their displeasure with the dollar doesn’t really solve the problem does it?
Meanwhile, traders sent the only signal that matters in markets: sell! The dollar fell to an eighteen-month low against the euro, crossing through the technical resistance traders identified at $1.30. Against the pound, the dollar fell to a two-year low. It was about the only victory this weekend for a product of Britain.
How much lower can the dollar go and how soon? It is widely believed that the U.S. Fed can’t or won’t raise short-term interest rates any higher than the current rate of 5.25%. Caught between a nation of debtors on one hand and a crumbling housing market on the other, any Fed action to defend the dollar is effectively an attack on American consumers.
In the spirit of last night’s stirring Australian Idol final, we think of the dollar this morning as a global diva turning to an Opera House full of contented, shopped-up Americans. The applause is wild, self-congratulatory, and oblivious to the spectacle going on behind stage. The dollar takes a bow to its adoring fans, and rips a seam which is visible to everyone off stage, but nobody in the crowd.
It has to be this way. Americans in America have yet to really grok or suffer from the consequences of a falling dollar. Only chumps like your Australian-based, American-paid editor feel the day-to-day consequences of a badly managed currency. How low can it go? We predict it’ll be worthless. How soon? That is up the common sense of America’s benevolent lenders.
Off the American stage-in the trading rooms of Europe, Asia, and the Middle East-is where all the real drama is these days. The flip side of a record Black Friday weekend is a huge November and December trade deficit for America. America is on pace to rack up at $716 billion trade deficit with the rest of the world this year. The news is obviously making traders nervous. They are edging, discreetly, toward the door.
Yet, despite all the concern over the structure of the global economy this year, it hasn’t fundamentally changed in 2006. More imbalances. More consumption than production. More reasons for traders to sell the dollar, buy gold, and distance themselves as far as possible from dependence on the American consumer.
That last issue-dependence on the American consumer to drive global growth-is the biggest looming question for the global economy as we approach 2007. How much is the cozy-relationship between Australian raw materials and Chinese production dependent on American consumption? If the buck falls even more, what does it mean for global financial markets? Does a weaker dollar take the steam out of the private equity blitzkrieg taking place on Australian markets?
And here we thought it was going to be a quiet weekend, dear reader. Markets are funny like that. They do their most important work just when you think it’s safe to look away. Yesterday we walked along the Gap along the South Head and came across the anchor of the Dunbar, a ship that sunk in the harbour in 1857.
Only the anchor, a huge piece of iron, remained. Everyone on the ship save one was killed. Most ships never sink, which makes the shipwrecks and the stories memorable. All currencies, on the other hand, eventually sink. Those who think the dollar will be the exception… are lost at sea.