US Economy: Are happy days here again, or is it headed for a crash landing?
Rosy predictions were everywhere a few weeks ago as the DOW tried once again to pass the 11,000 mark - the point it was at when Bush took office, never to be seen again. It almost made it, but then the bad news rolled in once again - the economy is not making enough jobs, the value of the dollar continues to drop, and oil prices are heading for the moon. Is this country being economically mismanaged? Why is the adminstration proposing more oil drilling, instead of coming up with a plan to get us off foreign oil? Why does the administration do nothing as good paying jobs disappear? Could it be because their real allegiance is to the multi-national conglomerates instead of to the USA? After all, who benefits from the administration's policies the most, you, or Big Oil?
Also, one should note from this article how the falling dollar is a chicken about to come home to roost. Interest rates in this country are about to go up, like oil, way up. The entire economic "recovery" of the last two years has been supported by the lowest interest rates in history. What happens when that is reversed? Can you say "recession"? And if hands-off free market capitalism is so great, why are the worlds two largest socialist economies, Germany and China, running huge surpluses while our economy is going in the tank, especailly given that the Germans pay much more dearly for oil?
Dollar Under Fire from All Sides
Thu Mar 10, 2005 02:32 PM ET
Reuters News Service
By Jamie McGeever and Nick Olivari
NEW YORK (Reuters) - The dollar extended its slide against most currencies on Thursday on concerns over global central bank reserve diversification, a widening U.S. trade deficit and this week's dive in bond prices.
Having slumped to multi-month lows against its major counterparts on Wednesday, the dollar suffered another blow on Thursday after Japanese Prime Minister Junichiro Koizumi told parliament that, generally speaking, diversity in foreign exchange reserves was a good thing.
The Ministry of Finance, which manages the world's largest foreign reserve holding of $840.6 billion, quickly clarified that it has no plans to shift funds out of the dollars.
"Although MoF quickly suggested that they had no plans to change now, the suspicion lingers that more Asian central bank diversifiers are to appear," wrote Goldman Sachs analysts in a research note on Thursday.
But the specter of diversification was raised again, putting pressure on the dollar again, much as had happened after South Korea's central bank mentioned the subject in a report last month.
Midafternoon in New York, the euro was up 0.4 percent at $1.3432 . The dollar was down 0.5 percent at 1.1528 Swiss francs . Against the Canadian dollar the U.S. dollar is buying C$1.2026, after a 0.3 percent decline.
The dollar was little changed to slightly higher against the yen at 104.06 yen , while sterling also little changed at $1.9231 .
The yen came under some selling pressure after weak Japanese core machinery orders. The euro rose to 140.00 yen earlier in the session for the first time this year.
Sterling managed to take the Bank of England's decision to kept interest rates unchanged at 4.75 percent largely in its stride.
"The 'diversification' word really spooked the market ... but the bond market selloff is weighing on the dollar big time," said Samarjit Shankar, director of global strategy at Mellon Bank in Boston. "The bond market is really adding that extra piece of weight on the dollar right now."
The price of U.S. Treasuries have fallen steeply this week, pushing the yield on the 10-year note up to 4.57 percent overnight (US10YT=RR: Quote, Profile, Research) , its highest level since July last year.
Though now down at around 4.48 percent on Thursday,, they have broken convincingly through key technical levels that have been intact for several months.
Thursday, a new auction attracted average demand with indirect bidders, including investors and foreign central banks, picking up 11 percent of the issue. That compares with 29 percent in the original sale last month but better than the 10 percent seen at the last reopening.
The rise in bond yields is sometimes seen as a supportive factor for a currency, as it offers investors a higher rate of return relative to other fixed income markets.
But not in this instance.
Both the diversification and bond weakness themes aren't constructive for the dollar, say UBS currency analysts.
"The markets fear that dollar selling by Asian central banks plus less buying of US Treasuries will cause higher U.S. interest rates and lower capital inflows, to the detriment of the dollar globally," they wrote in a research note on Thursday.
"We also suggest investors need to watch very carefully the sharp sell-off in U.S. bond markets generally," they added.
TRADE DATA AHEAD
The massive U.S. current account deficit hasn't been particularly good for the dollar either in recent years, and a reminder of this may come on Friday morning when the Commerce Department releases January's trade data.
The figures are expected to show a deficit of $56.5 billion, slightly wider than the previous month and what would be the second widest on record.
Data released on Thursday from two of the U.S.'s biggest trading partners suggest its deficit won't be narrowing significantly any time soon.
Germany, the euro zone's largest economy, appears to be coping with a strong currency, as it posted a trade surplus of 12.9 billion euros in January on record exports. China posted a surplus of $11 billion in the first two months of the year.
Elsewhere, U.S. weekly jobless claims, which rose an unexpectedly high 17,00 last week, kept the dollar under pressure too, analysts said. Economists had expected no change.
Recall that earlier generations faced down fascism and communism not just with missiles and tanks, but with sturdy alliances and enduring convictions. They understood that our power alone cannot protect us, nor does it entitle us to do as we please. Instead, they knew that our power grows through its prudent use; our security emanates from the justness of our cause, the force of our example, the tempering qualities of humility and restraint.
-President Barack Obama, 1st Inaugural address