js7a's Journal: China Decoupling Currency: Be Careful What You Ask For

Dollar expected to fall amid China's rumoured selling

The dollar could slide still further, in spite of hitting an all-time low against the euro last week in the wake of George W. Bush's re-election, currency traders have said.

The dollar sell-off has resumed amid fears among traders that Mr Bush's victory will bring four more years of widening US budget and current account deficits, heightened geopolitical risks and a policy of "benign neglect" of the dollar.

Many currency traders were taken aback on Friday when the greenback fell in spite of bullish data showing the US economy created 337,000 jobs in October.

"If this can't cause the dollar to strengthen you have to tell me what will. This is a big green light to sell the dollar," said David Bloom, currency analyst at HSBC, as the greenback fell to a nine-year low in trade-weighted terms.

The dollar's fall comes as the Federal Reserve is widely expected to raise US interest rates by a quarter point to 2 per cent when it meets on Wednesday and to signal that it will continue with a measured pace of rate increases.

Speculative traders in Chicago last week racked up the highest number of long-euro, short-dollar contracts on record. Options traders have reported brisk business in euro calls - contracts to buy the euro at a pre-determined rate.

However, the market has been rife with rumours that the latest wave of selling has been led by foreign governments seeking to cut their exposure to US assets.

India and Russia have reportedly been selling US assets, as well as petrodollar-rich Middle Eastern investors.

China, which has $515bn of reserves, was also said to be selling dollars and buying Asian currencies in readiness to switch the renminbi's dollar peg to a basket arrangement, something Chinese officials have increasingly hinted at. Any re-allocation could push the dollar sharply lower and Treasury yields markedly higher.

Commentary on Kos: Are the Chinese Pulling the Plug on the US Banking System?

It indicates that they have lost faith in the US Dollar, and US government debt. If this is accurate, then rates are going up A LOT.

Even without this move the Fed is expected to raise short term rates by 25 basis points (0.25%), and given the "robust" economic numbers, I would not be surprised if they raise them by 50 basis points.

As interest rates rise, the home market slows down, and we will see a decrease in property values if the rates go from their current 5-3/4% to the historical norm of 9%.

In our hollow economy, the primary driver of economic growth, people tapping their increase in home equity will come to an end.

What's more a significant number of the homes out there have adjustable rate mortgages (ARMs).

This means that there are a lot of people who bought more house than they really could afford who are in for a shock.

Arms have a lockup period, where the rates stay the same, typically 5 years.

That being the case, I'm wondering what percentage of homes out there are using ARMs, as opposed to fixed rates? Additionally, what percentage of those ARMs are now, or going to start being adjustable in the next 6-12 months?

The String to Pull America By

[snjoseph]

The state of international finance capital today is a very interesting aspect of world imperialism that I wish was discussed more. The plain fact is that the US government is funded by what amounts to massive foreign aid by the rest of the industrial world; they know quite well that America has no way of paying its outstanding debt if they were ever to demand it, but they won't because the US is too central to the world economic system to allow for a major crisis.

But two counterveiling factors have emerge

Re:The String to Pull America By

[js7a]

more interesting discussion here [yahoo.com]

Re:The String to Pull America By

[freejung]

Equally interesting is the question of when America will start pulling back. They have several strings to use against China, including the grip on their oil supply and the massive American market for Chinese imports. Will this lead to a cooler relationship with China? Will such economic bickering hurt everyone?

Re:The String to Pull America By

[js7a]

Will this lead to a cooler relationship with China?

If anyone in the U.S. deprives themselves of Chinese or any other large foreign labor market, they'll inflate our economy even further.

Will such economic bickering hurt everyone?

No, American exporters, like Catapillar, love the weak dollar.

Re:The String to Pull America By

[snjoseph]

They have several strings to use against China, including the grip on their oil supply...

Yes indeed. The fastest-growing consumer of oil is East Asia, and they've also got the fastest-growing dependence on Middle East supplies. I think this played a major role in the decision to invade Iraq.

...and the massive American market for Chinese imports.

It's harder to be aggressive with this one--remember that China's in the WTO, so any moves by the US on this front could justify retaliatory measures against

ARMs are for suckers,

[Safety Cap]

just like to lottery.

I, for one, hope to see a nice correction in the market within the next year or two.

My medium-term plan is to get into real estate in a big way; and I'd much rather buy in at a lower price, and if more suckers need to dump because their ARM suddenly balloons up, I'll be there to help 'em out with a quick flip.

Re:ARMs are for suckers,

[snjoseph]

My medium-term plan is to get into real estate in a big way...

Generally it's not considered the height of wisdom to invest at the end of a boom cycle.

...if more suckers need to dump because their ARM suddenly balloons up, I'll be there to help 'em out with a quick flip.

I think the point is, if interest rates go up and cause a collapse in real estate, people will be caught in a vise where their mortgage payments shoot up while their homes lose value--they won't be able to dump, since they may end up n

A really good thing for the American Worker

[Marxist Hacker 42]

A weaker dollar means our exports are cheaper overseas- which may be the one single item that can turn the outsourcing tide. This is GOOD news for the American Worker, despite it being bad news for the American Business Owner.