Tuesday, April 27, 2010

Nails, nails everywhere...

"When your only tool is a hammer, everything in the world starts to resemble a nail"

Variations on this rule of thumb vary, but it does seem to capture analytical ossification that clouds all technical fields, economics and finance included. The below article is interesting (more so because as you readers know I agree with its tenor), but fails to understand that dollar's strength derives primarily from two sources: The ability of the United States to tax its citizens, and the ability of the United States to provide security services for the world.

But alas, only economic arguments are proferred in the article. This is most unfortunate becuase currencies, being political inventions, are subject to the same socio-political sources of power and conflict that effects individual society and, indeed, the globe.

Beware the consequences of a resurgent greenback

By Mansoor Mohi-uddin

Published: April 20 2010 03:00 | Last updated: April 20 2010 03:00

This year the currency markets have been torn between fears over budget deficits in the eurozone and hopes that the global economic recovery is gathering pace. Amid all the noise and angst, however, a more profound change seems to be taking place, with the dollar starting to behave as a growth currency, appreciating at the same time as investors seek more risk in equities, commodities and emerging markets. In short, the exchange rate markets seem to be undergoing one of their periodic "regime shifts".

The picture was very different over the past decade. Following the bursting of the internet bubble in 2000, the dollar tended to benefit when investors turned risk-averse, and weaken when confidence returned to financial markets. As equities rallied from 2003 to 2008, the greenback fell to a record low of 1.60 against the euro. But when financial markets were gripped by risk aversion after the demise of Lehman, the dollar soared as investors uniformly dumped assets elsewhere and sought refuge in US Treasuries. As a result, the greenback became identified as a safe haven currency, along with the Japanese yen and the Swiss franc. The dollar's safe haven reputation has been enhanced this year by concerns that the eurozone may start to break up. The renewed decline of the yen as Japan only slowly emerges from recession and the frailty of Britain's economy have also supported sentiment towards the dollar.

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