Vivek's Finance and Economics Blog

Monday, November 28, 2005

Year of the Dollar

America's current account deficit hit a record $66.10 billion for the month of September, a record which is sure to be broken in coming months. America, world's largest and strongest economy is also one of the world's most heavily indebted one! If it were any other country IMF would surely have gone to town for a bailout mission. Economic convention may suggest given such high deficits US dollar should weaken, a convention even Warren Buffet believes enough to have a large bet on dollar's decline. However, this being america, home of capitalism conventional wisdom does not apply, not yet atleast! The greenback is up 13% this year against Euro and Yen. The much talked about chinese yuan revaluation has resulted in a gigantic appreciation of yuan ... by 1%. So, what is going on with the US economy? Today's WSJ has this to say-

The Dollar remains attractive to investors for a few reasons, starting with interest rates. The federal reserve has raised the price of credit for 12 consecutive meetings, cranking up short rates to 4%. Meanwhile, the Eurpoean Central Bank, supplying euros to a sluggish Continent, is only now thinking of budging from its historic low of 2%, set in June 2003. If the dollar yields twice as much as the Euro, thats an easy suitor to pick from the crowd.

Similar things are going on Japan, where interest rates are at "extremely low levels" to keep fueling the recent growth momentum.

The Journal further states-

The relative economic health of nations of course also influences currency demand. The US economy has continued to power along while most of Asia is gradually slowing and Europe bumps along. Most economists expect America to expand at around 3.5% rate in the fourth quarter and into next year-nothing to sniff at. Employment is rising. So far consumer spending remains strong, despite the slow down in housing. This isn't a picture of a country in distress.

I guess it is safe to assume that Warren Buffet is not a happy man these days.

0 Comments:

Post a Comment

<< Home