Many perceive the US Dollar to be a safe heaven, never mind that the US economy is in shambles and the largest banks and automotive companies are almost to the brink of bankruptcies, never mind that US has been selling Treasury bills by the tons to avert a financial collapse and never mind that the US stock markets have shed its value by about half in less than one year! The US Dollar has in fact appreciated against most major currencies by a large scale except for the Yuan and the Yen.
So what caused the Dollar to appreciate?
- Risk aversion to global markets, due to the crash in most global asset classes and the credit crunch in the US. There is therefore a strong demand for US Dollar to be averted back to the US. Also, severe deterioration in world wide economy following the US footsteps has further caused risk aversion and repatriation of funds from both developed and emerging markets.
With the US resorting to printing money (or technically termed as "quantitative easing" to make it sound diplomatically correct!) in order to bailout the banks and save the faltering economy, questions are asked whether the Dollar's strength can sustain in the future.
In essence, any currency will lose its value when the supply is more than demand over time. The problem with quantitative easing is that by the time the money reaches the level of the common consumer and caught up with the excess money in the market, inflation cripples in and the dollar worth of currency will therefore be reduced. This is not the case when the money is first injected as it takes time for inflation to recognise the new money and catch up.
As such, the current strength in US Dollar will likely be hampered in the long term as inflation or hyperinflation takes effect in the US, as and when the economy recovers.
It is also likely that prices of commodities will again be on the rise by then!
On the other hand, better lock down your mortgage rates before interest rates move up in tandem with inflation or a hyperinflation!
Wednesday, March 18, 2009
Is US Dollar A Bubble In The Making?
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2 comments:
Your assessment of what will happen when the economy recovers from recession is a warning to be careful at that time for which locking the loans at lower rates is advised. But tell me when can be the present recession be expected to improve. Good post indeed.
Adding you to my Friends list.
Hi Kannan,
Well, trying to predict when the recession will improve is a tough one, simply because the current fundamental issues particularly with the US banking system are just too deep!
You could clearly see that the current situation has hardly improved despite trillions of dollars of bailout funds spent!
Having said that, i believe the next critical step is how well the plan to takeover toxic loans from banks is to be implemented and take effect, so that the banks can continue to run their normal business and accelerate lending to spur the economy. Without the banks in reasonable shape and splashing out money, the entire money supply chain will be locked or congested!
Bear in mind, it may take another 3 to 6 months or so to assess its effectiveness. So assuming the plan is approved sometime in April or May, we could be looking at potentially end of 2009 or 2010 for signs of recovery.
Just be prepared that things could get worse become any sustainable form of recovery as well.
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