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Subject:  Re: “The End of Dollar Hegemony” Date:  3/1/2006  3:47 PM
Author:  TheNajdorfDefens Number:  15613 of 36324

Jack, I liked your post, however, as a former FX pro I would take issue with some of your points:

IMHO the prolification of the USD is tied more to our Treasury market and thus our national debt, economic strength and the taxing power supported by that strength. ...
The US treasury market has greater transperancy, greater liquidity, greater deapth and breadth then any other securities market.


BMuch international trade is based on the USD in the form of treasuries, they act more as the currency then direct dollar for Xcurrency exchange then any other vehicle.

No, the FX market does about $2trillion a day in trades, dwarfing the UST market. Very few people buy UST bonds as a substitute for cash. Simply compare the size of the markets.

The Euro, on the other hand, is a confederacy currency. As such the politics behind it our less clean and clear cut; as frightening as that may seem. The faith in the Euro central banks does not compare to the faith the international market has in our central banking system, complete with its warts.


China remains somewhat xenophobic in its international relations and manages its debt and currency issues accordingly. China and India may be the next nexi of international economic growth but they do not have stability nor do they have equal natural resources of the US. IMHO real long term threats would come from a stable and united: Africa, South America or the former Soviet blocks.

JMHO, I disagree, but that's jmho.

In order for that to occur they would have to A)Unite in a long term politically stable fashion, B)unseat the 800lbs and 600lbs gorillas currently occupying those seats. The transition, if it occurs, will be slow.


This doesn't mean that the USD's international value isn't flexible or that there isn't potential for significant downside risk with the USD. That is a market driven issue. ... Historically the USD has moved around $1.20 = Euro(or a basket of european currencies)as a center point.

Flexible = true. $1.20 per basket, way, way offbase, historically.

Through the last 2/3 of the Clinton administration the US economic engine provided enough revenue for the US to start to buy down its debt. This had the effect of strengthening the dollar; there was less US debt and thus more competition for it and its underlying currency.

The USDollar rose back then because we had the highest interest rates of any G-10 country, the short-term rise and fall of the accounting fiction known as the US Budget Deficit is totally and entirely irrelevant.

The US has returned to defecit spending and the US Treasury market and thus the USD have been slowly repriced accordingly.

Because we went from the highest yielding currency to the 2nd/3rd lowest among the G-10, trailing only Japan/Swiss.

As a moderate contrarian I don't see epic shifts forthcoming in the USD. I respect the potential and act accordingly. But as long as their are international entities willing to price US debt favorably its a reasonable decision to finance our obligations using debt. If we viewed the US as a corporation we would applaud them for financing with cheap debt.

Bingo. Couldn't agree more.

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