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bailej03

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Pegging your currency to the USD to maintain the affordability of your exports by USA consumers typically involves creating new money at a like rate to the USA. However, if your economy didn't need such monetary stimulation, it may seriously overheat. Thus, at some tipping point, the slowly-lessening advantages of pegging to the USD presumably become outweighed by the growing disadvantages, and the peg is junked.

 

My questions about this tipping point are twofold:

 

1. Is there a first-mover advantage in junking one's peg, in order to obtain the best exit prices for one's USD holdings? That is, is it likely that the world will get any early warning of such a monetary shockwave? In other words, are there any strong motivations for any first-moving USD-dumper to warn of their intentions? Note that I'm not talking about motivations for issuing the usual empty threats.

 

2. I dimly perceive that any decision to allow the Yuan to fully strengthen involves China choosing between two evils: the loss of USA consumer markets, and the destructive outworkings of the overheating of the Chinese economy. But are there any more positive motivations from China's viewpoint for a stronger Yuan, such as the acquisition of cheap USA assets? Or are USA protectionist measures likely to be escalated ahead of any large-scale Chinese acquisitive moves, and be adequately effective?

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In reply to: cooma on Sunday 23/09/07 06:03pm

I suggest another really useful source of discussion on the USD is a blog run by Brad Setser. His blogs are on the website of Nouriel Roubini, who is a well regarded academic economist (and who for some time has been calling the US housing to crash and burn). Apparently both Roubini and Setser picked that the USD would weaken in 2005 and when it did not they copped a fair amount of derision from the bulls. Since then Roubini has moved on to other topics but Setser has not.

 

Most of Setser's blogs are about international trade and currencies and he seems to focus on two imbalances the US has: one is with China and the other is with all the petro-economies. From memory he made a distinction between the east Asian industrial countries like China and Japan who want to support the USD (so that the US can keep buying toys and cars from them) and the petro-economies who are more ambivalent. For instance Iran (surprise) already requires Japan to pay for its oil in yen and not USD.

 

Wossname - I think Setser would argue that China and Japan are in too deep to think of being first movers away from the USD but oil exporters like Iran and Russia may see less reason to keep up the charade.

 

The url is http://www.rgemonitor.com/index.php

 

regards

 

triage

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In reply to: triage on Sunday 23/09/07 08:42pm

Hi Triage,

 

"...Setser would argue that China and Japan are in too deep to think of being first movers away from the USD but oil exporters like Iran and Russia may see less reason to keep up the charade."

 

I was using China as a well-known example, I don't have any strong opinions about which country might choose to dump the dollar first. However, if your source Setser thinks that oil exporters like Russia and Iran would have the least to lose by breaking their USD linkages, I've no reason to argue. Russia in particular has me wondering, given that the M3 growth rate there is reportedly approaching 50%. I mean, how long can that go on for? In relation to Iran, my question would be whether it has enough international influence to start any anti-USD trends yet.

 

I'm still interested in what benefits countries might perceive that they could gain by changing their currency relationship to the USD, and how they might go about it. I suspect that the current wisdom on this topic may be an oversimplification of the complex balance of pros and cons involved. Further, if there does happen to be a first-mover advantage, repudiation of the USD might begin without warning, and could conceivably become a rout.

 

Any currency buffs out there?

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In reply to: Yeti on Monday 24/09/07 07:23am

It was one of the 15/9 lot of 4.

 

Listen to the last 20 mins of the !st hour to get the gist of the future behaviour of Gold.

Then when you have time, listen to the 4, then the next 4 from 22/9.

I download onto my Ipod and listen when convenient.

 

Cooma

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Tend to agree Woteva, for at least the following reason: Treasury International Capital flows, net of trade and budget deficits, have upticked in recent times, as can be seen on the plots titled "The International Dollar - Income and Expense" at http://www.nowandfutures.com/key_stats.html.

 

For those like me who didn't know, TIC flows, net of deficits, reflect international demand for the dollar. Of course, changes in demand for anything are a predictor of where the price is headed. Thus, TIC flows, net of deficits, are correlated to the international value of the dollar, and show the trend and expected trend quite well.

 

Thus this uptick in net TIC suggests that the USD value may rise too for a bit. A potential caveat concerns how well the curve reflects the most recent TIC flows.

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