Barry Ritholtz at the big picture has a post showing that the money supply grew at an astonishing 24.3% according to the St. Louis Fed’s financial data.
Note that this number does not include the Fed’s rate cut or the emergency injection of money by the world’s central banks to stabilize the dollar.
More dollars chasing the same amount of goods equals inflation, in this case, it looks like double digit inflation, and probably the dollar falling of a cliff in currency markets.
Clearly, this means that the European Central Bank does not intend to match the US Federal Reserve Rate cuts. The Bank of England also left rates unchanged.
Honestly, the comments made when this was done were not informative, but my guess is that the ECB sees supporting the dollar right now, absent better US fiscal policy and a reduced trade deficit, as a losing game.
Citigroup sees 3Q earns down 60 percent
UBS forecasts pretax loss up to $690M
Dollar Slumps to All-Time Low Vs Euro: Financial News
So the dollar is at an all time low, but the Dow hits an all time high. I’m inclined to view the dollar as trend, and the Dow as noise, but YMMV.
Checkhere.
It was about $1.001 US: $1.00 CDN at mid-day.
We have another new low for the dollar. It hit $1.4234:€1.00 this afternoon. Its previous high was $1.4189:€1.00.
It was only a week or so ago that it broke $1.40:€1.00, this is a precipitous drop, and it will eventually force interest rates up…a lot.
The Saudis have been pegging the Riyal to the Dollar for years. One of the things that this requires is that the interest rates in the two countries remain the same, otherwise there are pressures for them to move relative to each other.
The Saudis have made it clear that they will not follow the recent Federal Reserve rate cuts.
This will place further downward pressure on the dollar, and make it more likely that other Arab oil Sheikdoms will follow suit. Kuwait actually preceded them on this action, breaking the peg in May.
I just checked, and 0.9866$US=1.$CDN.
5 Years ago it was around US 63 ¢ for a Canadian dollar.
Note: 100 Basis Points is 1%.
The dollar is now $1.3972:€
Note the spike that happened as soon as the Fed announced at 2:15 (Times are in GMT), so 6:15 GMT is 2:15 EDT).
I think that we got the worst of both worlds today, the currency traders care if the fed slashes rates, but mortgages, commercial paper, and interbank lenders don’t.
China’s central bank has raised interest rates by 27 basis points.
As I have mentioned earlier, food prices are skyrocketing there, but the higher interest rates available in china is one more factor in making the dollar less attractive.
The dollar may float downward for a bit, but given the nature of currency markets, eventually, it will crash, and probably overshoot it’s normal equilibrium price, and rising Chinese interest rates, and falling US interest rates within a few days of each other is a double whammy that the dollar can ill afford.
It’s record high, and the basic reason is supply and demand, but it is also that oil is being denominated in a depreciating asset, the US dollar.
Oil exporting countries buy things denominated in Euros, Yen, Sterling, etc., and they can buy less of this when the dollar falls.
If the Fed cuts rates tomorrow, and all signs point to this, I would expect to see a new record low vs the Euro in the next 5-10 business days.
Because of the widespread expectation that the Fed will cut rates, the Dollar has hit a 15-year low.*
This is the conundrum that I’ve mentioned earlier. If the Fed cuts rates, it pushes the dollar down, driving up the cost of imported goods, and hence inflation, and if it doesn’t we see the economy tank.
The dollar is unsustainable high. It’s probably still got at least 15% to fall against the Pound and Euro, and likely 30-50% against the Yuan.†
*Basically, low interest rates send foreign money looking for places with higher return on investment.
†This is just my wild assed guess, based on nothing by my gut.
I said that an downturn would force the Fed to push interest rates down, and that this would hose the dollar, leading to a falling dollar, and from there import driven inflation, as the cheap crap we buy from Chins becomes more expensive. Well, Richard X. Bove, a respected analast for Punk Ziegel & Co.has just written the same thing.
He’s saying that cutting interest rates to help salvage mortgage lenders will not save them because, “Lower interest rates will send the dollar into a tailspin and wreak havoc in the job market.”
Nice catch 22, but it gets worse, Chinese inflation is surging, it just hit 6.5%, the highest rate in 11 years.
This means that their central bank is going to have to boost interest rates, which will strengthen the Yuan.
Of note, food was a primary component, 18.2% year over year (Pork 49, cooking oil 34.6 %, eggs 23.6 %, fresh vegetables 22.5 %), and this will lead to civil unrest, probably to coincide with the Olympics, unless they reign this in aggressively.
This is going to get ugly.
Way down right now, though for some reason the $US is up relative to the Euro.
My only advice: Don’t trade now, things are panicked.
Brad DeLong’s Semi-Daily Journal
So, today the monetary base in the North Atlantic economies is 7% higher than it was yesterday–an annualized growth rate of 2100% per year.
This is indeed a significant liquidity event…
Oh
my
God!!!!!
Home sales tumble in response to credit crunch. Just so you know, that’s what the National Association of Realtors is saying, so that’s the sunniest possible outlook.
Stocks tanked yesterday because a French Bank said that it had to freeze funds for lack of liquidity. Basically the meltdown is going global, and the securities that they hold are illiquid. They are not normally bought and sold, so there is no market for them.
When Bear Stearns funds went out for sale, they were getting less than 10 cents on the dollar as offers.
The European Currency Board (ECB) and the Federal Reserve have injected billions in liquidity to prevent a collapse. While this is not an extraordinary action for the Fed, this resembles things like the LTCM bailout, it is for the ECB.
The ECB’s scope is far narrower than that of the Fed. They are not charged with anything but controlling inflation, at German insistence (there are still a few Germans alive remember needing a wheelbarrow of money to buy a loaf of bread).
It’s interesting, because if they break the Federal Reserve, and they can, they lose too, because they have lost their biggest market.
At this point, I’d like to see them use their power to keep us from striking Iran.
Well, the Dollar Hits Another Low Against Euro: Financial News.
The thing about these sort of moves is that they are not gradual. The dollar will slowly drift lower, then it will drop off a cliff when the herd mentality cuts in.
This is significant. Russia considers the protection of its remaining defense infrastructure to be a crucial part of both its economy and its military capabilities. The fact that it is willing to risk alienating India over this in the midst of a huge competition to replace the IAF’s MiG 21s, indicates that they have a very real concern about the dollar crashing.
A Euro Exchange for India’s Russian Accounts (Subscription Required)
Aviation Week & Space Technology
07/23/2007, page 36Neelam Mathews
New DelhiIndia considers shift from the dollar for its Russian military contracts
Printed headline: A Euro Exchange
A fallen dollar has pushed India into a corner on its Russian military contracts.
A recent Russian insistence that India must pay more for defense equipment—how much is not known—to offset the effects of a weaker dollar has unnerved the Indian defense ministry, which already faces demands for an additional $10 billion in procurement.
India, which wants to keep its Russian military purchases on track, has begun studying Russia’s suggestion to convert purchases to the euro. But if it chooses to do so, the bill would be high: The exchange rate is currently nearly $1.38 to €1.
…
Is this another nail in the dollar’s coffin?
Dollar Hits New Lows Vs. Euro, Pound: Financial News.
FWIW, the Canadian Dollar is near parity, $1.0431CDN:USD.
The Fed cannot lower interest rates, it would create a run on the dollar.
While I have talked about currencies, it has primarily been about the fall of the dollar relative to the Euro. A more significant risk in the short term is a strengthening Yen.
Much of the current investment mania has been driven by the Yen carry trade.
Basically, Japan has the lowest interest rates in the industrialized world, so if one borrows money in Yen, and invests them in another country.
The Japanese interest rates are currently arounc 0.5% (no, I did not misplace a decimal point), so you could invest in the US at around 4-5%, and pocket the difference.
The rates are low because of the long Japanese recession, and deflation, starting in the early 1990s.
The carry trade is not risk free. If the Yen strengthens versus the Dollar, then you have to pay back more dollars, and you can end up losing money.
Japan appears to be finally over its 15 year downturn, it’s economy “grew at a 3.3 percent annual rate in the first quarter”, so it’s likely that the central bank will raise rates, which will bolster the Yen generally.
In any case a rate of 0.5% is simply not sustainable, so it has to go up, and the currency can be expected to go up then too.
So, in addition to the private equity binge, sub prime mortgage securities, exotic mortgages generally, and an IPO boom, we have another potential for a collapse with the Yen strengthening.